ACC 630 - Audit Practice Questions

Which service is NOT an example of an attestation service? a. Investigation of website security b. Review of historical financial statements c. Opinion on the effectiveness of internal controls over financial reporting d. Audit of historical financial statements

a. Investigation of website security

Which of the following is least likely to be considered a related party? a. Investment in another entity accounted for by the fair value method b. The son of the CFO c. The spouse of a principal owner d. Employee benefit plan trust under the trusteeship of management

a. Investment in another entity accounted for by the fair value method

Under the Securities Act of ______, the defendant in a Section 18 suit must prove that he or she acted in good faith. a. 1934 b. 1944 c. 1943 d. 1933

a. 1934

What is the most common base used by auditors for planning materiality for publicly traded companies? a. 5% of pretax income b. 5% of total assets c. 1% of total assets d. 1% of pretax income

a. 5% of pretax income

Scott, a tax accountant, was asked by his client to perform an audit of their financial statements. While Scott has accounting and auditing knowledge, he has not performed audits before. Which of the following approach of Scott is least likely to do? a. Take on the audit work for the client. b. Not take the professional service because Scott does not have sufficient competence to perform the service. c. Take appropriate professional education courses and consult experienced colleagues. d. Refer the client to another CPA with appropriate qualifications.

a. Take on the audit work for the client.

Which of the following circumstances requires an auditor to communicate as soon as practicable with those charged with governance of the entity? a. The auditor concludes there is material weakness in the entity's design or implementation of internal control. b. The auditor identifies internal control strengths. c. The auditor identifies any deficiencies in internal controls. d. The auditor identifies minor weaknesses in implementation of internal control.

a. The auditor concludes there is material weakness in the entity's design or implementation of internal control.

Which of the following is NOT true about narratives used to document internal controls? a. They are well-suited for complex accounting environments. b. They describe the flow from start to finish. c. They are the most common form of internal control documentation. d. They are primarily text-based documents.

a. They are well-suited for complex accounting environments.

Which of the following would most likely impact auditor performance? a. Economic conditions b. Firm policy and procedures c. Audit firm independence d. Audit firm reputation

b. Firm policy and procedures

If audit risk is set at low, inherent risk is high, and control risk is low, what should auditors set for detection risk? a. Very low b. Medium c. Low d. High

b. Medium

During an audit of Lucas Manufacturing, a public company, the financial statements were found to be presented fairly, except for one uncorrected material departure. Which type of audit opinion should be issued? a. Unqualified b. Qualified c. Adverse d. Disclaimer of opinion

b. Qualified

The _______ establishes procedures for receiving complaints regarding accounting or internal control matters of the company, including receipt of anonymous complaints from employees. a. PCAOB b. audit committee c. auditor d. full board of directors

b. audit committee

If the auditor determines that inherent risk and control risk are high, the best audit strategy to use is the a. fraud risk approach. b. substantive approach. c. detection approach. d. reliance on controls approach.

b. substantive approach.

The typical range of overall materiality benchmarks for total assets and total revenues is which of the following? a. 2.5% to 7.5% b. 5% to 10% c. 0.25% to 2% d. 1% to 5%

c. 0.25% to 2%

Which of the following is considered a preventive control? a. Software that compares all bills of lading with sales invoices. b. Reviewing account receivable credit balances to determine their causes. c. Checking employee ID numbers to the master file before issuing paychecks. d. Bank reconciliation and follow-up of unexpected outstanding items.

c. Checking employee ID numbers to the master file before issuing paychecks.

If a management team needs to confirm best practices in designing internal control systems, they should consult the a. Public Company Accounting Oversight Board (PCAOB). b. American Institute of Certified Public Accountants (AICPA). c. Committee on Sponsoring Organizations of the Treadway Commission (COSO). d. National Association of State Boards of Accountancy (NASBA).

c. Committee on Sponsoring Organizations of the Treadway Commission (COSO)

Shen Yu is interested in determining whether their packaging supplier will survive the next economic downturn. Shen is most likely which type of financial statement user? a. Lender b. Investor c. Customer d. Supplier

c. Customer

During the audit of Barnaby Enterprises, Julia Leung, a staff accountant, has a disagreement with her intern regarding the application of the lease accounting standard. What should Julia do first? a. Discuss her concerns with higher management b. Discuss her concerns with the audit senior c. Determine if the difference of opinion may result in a material misrepresentation d. Consult her attorney

c. Determine if the difference of opinion may result in a material misrepresentation

A new employee allows a customer to purchase compressed gas, even though the customer is not authorized for additional purchases until they pay their balance in full. This exemplifies a risk for which transaction? a. Depositing cash b. Receiving cash c. Initiating credit sales d. Delivering goods

c. Initiating credit sales

What does the NASBA do for individuals who apply to sit for the CPA Exam? a. It creates the CPA Exam. b. It scores the CPA Exam. c. It serves as the application center. d. It serves as an alternative to online application.

c. It serves as the application center.

Which of the following is an example of an inherent risk factor? a. Poor tone at the top of the company b. Lack of segregation of duties c. Large volume of non-routine transactions d. Sampling risk

c. Large volume of non-routine transactions

Which of the following is an example of a common inherent limitation in internal control? a. Businesses with annual profits exceeding $500 million cannot be audited fairly. b. Small businesses have little need for internal controls. c. The company CEO and COO conspire to hide unauthorized expenses from the CFO. d. The company's relationships with government agencies are very complex.

c. The company CEO and COO conspire to hide unauthorized expenses from the CFO.

Which of the following materiality benchmarks is most appropriate for a not-for-profit organization audit? a. Net assets b. Pre-tax income c. Total assets d. Net income

c. Total assets

The _______ is designed to regulate the offering of a new security to the public through the mail or in interstate commerce. a. Antifraud provisions of the 1934 Act b. Private Securities Litigation Reform Act c. Truth in Securities Act d. Foreign Corrupt Practices Act

c. Truth in Securities Act

Which of the following is considered an output control? a. Sequence tests b. Control totals c. Visual scanning d. Valid code check

c. Visual scanning

The CPA willfully signed the reports with full knowledge despite that there were material misstatements. This criminal liability may be subject to the following except a. monetary fines up to $100,000. b. revocation of the CPA license. c. imprisonment up to 20 years under violation of SOX. d. imprisonment for no more than 5 years.

c. imprisonment up to 20 years under violation of SOX.

An engagement performed by a practitioner to provide limited assurance that financial statements need no material modifications is BEST described as a (an) a. audit engagement. b. assurance engagement. c. review engagement. d. compilation engagement.

c. review engagement.

An auditor mistakenly concludes that a company is financially sound based on an incorrect appraisal of the company's pension obligations. This best exemplifies which of the following risks? a. Control risk b. Inherent risk c. Detection risk d. Audit risk

d. Audit risk

What is the main similarity between conflict of interest and subordination of judgment? a. There is no key similarity between conflict of interest and subordination of judgment. b. Both are always the result of an advocacy threat. c. Both affect objectivity, but not integrity. d. Both can lead to a misrepresentation of the facts.

d. Both can lead to a misrepresentation of the facts.

When auditing the client, the auditor asked for supporting documents for certain sales orders. A few sales orders have the supporting invoices issued but were lacking the bill of lading and packing slip. This exemplifies a risk for which key assertion? a. Valuation and allocation b. Cutoff c. Classification d. Completeness

d. Completeness

What is the reason for an audit of internal controls? a. It guarantees that management has not altered financial statements. b. It assures that any fraud has been corrected. c. It assures that all financial statements are accurate. d. Effective internal control enhances the reliability of financial reporting.

d. Effective internal control enhances the reliability of financial reporting.

The following are true statements about internal control EXCEPT? a. Internal control encompasses all of the elements of an organization. b. Internal control helps an entity achieve its strategic and operating objectives. c. Internal control is a process effected by the entity's board of directors, management, and other personnel to provide reasonable assurance on achievement of reporting, operations, and compliance objectives. d. Internal control's objective only pertains to the effectiveness and efficiency of the entity's operations.

d. Internal control's objective only pertains to the effectiveness and efficiency of the entity's operations.

Which of the following is true of material weaknesses? a. If one or more material weaknesses are discovered during the audit, then auditors express no opinion on the effectiveness of ICFR. b. If material weaknesses are discovered during the audit, auditors adopt an alternative method to confirm their observation. c. If auditors encounter a material limitation in the scope of their work, they are required to disclaim an opinion. d. PCAOB AS 2201 dictates how auditors would modify the audit report to express an adverse opinion.

d. PCAOB AS 2201 dictates how auditors would modify the audit report to express an adverse opinion.

The use of which type of materiality should reduce the probability that the sum of immaterial and/or undetected misstatements in the financial statements is greater than materiality for the financial statements as a whole? a. Quantitative b. Qualitative c. Undetermined d. Performance

d. Performance

Due to a $500,000 mismatch in reported income, a vendor decides to audit its bank statements before it begins any further transactions and periodically confirm transactions with its bank for the foreseeable future. This exemplifies a control for which of the following? a. Recording sales b. Receiving cash c. Initiating credit sales d. Recording receipts

d. Recording receipts

Which of the following statements regarding risk is correct? a. There is both a direct and inverse relationship between the risk of material misstatement and detection risk. b. There is a direct relationship between the risk of material misstatement and detection risk. c. There is neither an inverse nor direct relationship between the risk of material misstatement and detection risk. d. There is an inverse relationship between the risk of material misstatement and detection risk.

d. There is an inverse relationship between the risk of material misstatement and detection risk.

While auditing Anastasia General Merchandise Corporation, which of the following can Alex Young, CPA, use as a benchmark for prepaid expense, and property, plant, and equipment accounts? a. Total liabilities b. Total sales revenue c. Total expenses d. Total assets

d. Total assets

Working papers are stored a. as an external or internal confirmation. b. as a positive or negative confirmation. c. in either paper or electronic form. d. in either the permanent file or the current file.

d. in either the permanent file or the current file.

There is a/an ___________ relationship between materiality level and sample size. a. converse b. inverted c. reverse d. inverse

d. inverse

Professional _______ requires the application of relevant training, knowledge, and experience, while professional _______ requires being alert to conditions that may indicate possible misstatement of financial information. a. expertise; fairness b. skepticism; judgment c. precision; accuracy d. judgment; skepticism

d. judgment; skepticism

Which of the following statements exemplifies the concept of materiality? a. A lower level of materiality assessed by the auditor means a lesser amount may potentially impact or change the users' decision-making. b. Materiality is always based on quantitative factors, not qualitative factors. c. Materiality refers to the content of any audit evidence gathered. d. Auditors must focus on finding all misstatements in financial statements.

a. A lower level of materiality assessed by the auditor means a lesser amount may potentially impact or change the users' decision-making.

Which of the following is the best synthesis of the term direct and material effect? a. A situation in which noncompliance with laws and regulations impacts amounts and disclosures already included in the financial statements b. A situation in which noncompliance with laws and regulations does not have a direct impact on amounts and disclosures in the financial statements, but could require the creation of a contingent liability or an additional disclosure c. Violations of laws or governmental regulations, which may result in fines or the possibility of future litigation d. An understanding of transaction level controls, the adequacy of segregation of duties, documents used by the client, and the entity's use of information technology

a. A situation in which noncompliance with laws and regulations impacts amounts and disclosures already included in the financial statements

Which of the following statements is incorrect regarding risk assessment? a. An auditor will perform various risk assessment procedures to ensure that appropriate attention is paid to the accounts and transactions least at risk of being materially misstated. b. Auditors make preliminary risk assessments while planning the audit. c. AU-C 300 Planning an Audit and AS 2101 Audit Planning require auditors to plan the audit by assessing risk to reduce audit risk to an acceptably low level. d. Audit risk is the risk that an auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

a. An auditor will perform various risk assessment procedures to ensure that appropriate attention is paid to the accounts and transactions least at risk of being materially misstated.

Which of the following are examples of the increased role of audit committees as a result of the Sarbanes-Oxley Act of 2002? a. Audit committees are responsible for knowing when to blow the whistle on fraudulent transactions. b. Audit committees are not responsible for resolving any disagreements between management and auditors over financial reporting. c. Audit committees are responsible for the meeting minutes. d. Audit committees are responsible for assessments.

a. Audit committees are responsible for knowing when to blow the whistle on fraudulent transactions.

Which of the following is required by PCAOB Standard 2201? a. Auditors must conduct an integrated audit for public companies. b. Auditors must conduct a financial statement audit for private companies. c. Management must conduct an integrated audit for public companies. d. Auditors must conduct an integrated audit for private companies.

a. Auditors must conduct an integrated audit for public companies.

Which statement below best exemplifies the principle of professional skepticism for an auditor? a. Auditors should be alert for any inconsistencies in the information provided to them. b. Auditors should assume that the information provided to them by the preparer is incomplete. c. Auditors are expected to apply specialized knowledge and experience. d. Auditors are expected to provide a professional opinion as to the company's solvency.

a. Auditors should be alert for any inconsistencies in the information provided to them.

The auditor discovered that revenues earned after year-end are included in the current year's income. This results in the following a. Material misstatement on both income statement and balance sheet. b. Material misstatement on the balance sheet only. c. Material misstatement on the income statement only. d. Has no effect on the financial statements for the current year.

a. Material misstatement on both income statement and balance sheet.

A company records that a customer paid its account in full on November 20th, but in fact it was a different customer in a different city that paid its account in full on this date. This exemplifies a risk for which transaction? a. Recording receipts b. Recording sales c. Receiving cash d. Depositing cash

a. Recording receipts

The management accepting responsibility for the design and maintenance of internal controls is a requirement stated in Section 404 of the a. Sarbanes-Oxley (SOX) Act of 2002. b. Securities Exchange Act of 1934. c. Securities Act of 1933. d. PCAOB bylaws.

a. Sarbanes-Oxley (SOX) Act of 2002.

Which of the following provides evidence for the completeness assertion? a. Tracing b. Visualization c. Vouching d. Scanning

a. Tracing

Santiago Plumbing Company is a small private company with no audit committee or board of directors. The auditors should then communicate their concerns to all except: a. accounting staff. b. CEO. c. those charged with governance. d. owner-manager.

a. accounting staff.

The basis for opinion paragraph of an audit report over the effectiveness of ICFR states that the Company's _______ are responsible for maintaining effective internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. a. management b. internal auditors c. auditors d. investors

a. management

All of the following are positive factors suggesting that an auditor should accept a new client EXCEPT a. management is preoccupied with meeting specific accounting numbers. b. independence problems can be resolved prior to client acceptance. c. management places a premium on representational faithfulness of accounting information. d. there are minimal regulatory reporting requirements.

a. management is preoccupied with meeting specific accounting numbers.

Criminal liability subjects auditors to ___________ or imprisonment or both. a. penalties of fines b. corrective action c. fees d. employee relations paperwork

a. penalties of fines

When pretax income is either negative or fluctuating drastically from year to year, auditors should use total revenues or total assets as a base for calculating a. quantitative planning materiality. b. qualitative performance materiality. c. risk materiality. d. professional skepticism materiality.

a. quantitative planning materiality.

When transferring information from an existing system to a new system, there are a. risks of data being corrupted or lost. b. no risks of the data being corrupted or lost. c. risks of the data being corrupted, but not lost. d. risks of the data being lost, but not corrupted.

a. risks of data being corrupted or lost.

Key components of an engagement letter include all of the following EXCEPT the a. type of audit opinion that will be issued. b. objective and scope of the audit. c. responsibilities of the auditor. d. responsibilities of management.

a. type of audit opinion that will be issued.

As of December 31, 2020, CleteCorp has the following selected financial data: net sales $1,450,000, net income $200,000, current assets $600,000, total assets $3,000,000, non-current liabilities $1,500,000, total liabilities $2,000,000. Calculate the current ratio. a. 1.5 b. 1.2 c. insufficient information to answer the question d. 0.4

b. 1.2

Lolita Fernandez is the audit manager of Valencia Auditing Firm. How many years of experience does Lolita most likely possess? a. 15 years b. 8 years c. 12 years d. 4 years

b. 8 years

Which AICPA and PCAOB standards require that auditors gain an understanding of the client's IT system, the associated risk, and related controls? a. AU-C 550 and AS 2410 b. AU-C 315 and AS 2110 c. AU-C 551 and AS 2410 d. AU-C 260 and AS 1301

b. AU-C 315 and AS 2110

What is a key difference between the concept of "independent in appearance" and "independent in fact"? a. Independent in appearance focuses on objectivity and impartiality whereas independent in fact focuses on conflict of interest. b. Independent in appearance can be observed whereas independence in fact is not easily observed. c. Independent in appearance can be enforced by law whereas independent in fact is only subject to professional conduct codes. d. Independent in appearance focuses on maintaining public trust whereas independent in fact focuses on conceptual frameworks.

b. Independent in appearance can be observed whereas independence in fact is not easily observed.

CloudBox is a publicly-traded software company. They have hired Midlands Auditing to provide an audit report, which will be used to secure a loan with Neighbors Bank. Which of the following best describes legal responsibilities and liabilities in this situation? a. Midlands Auditing may be liable to CloudBox Inc. under contract law, but not never tort law. b. Midlands Auditing and CloudBox Inc. have privity of contract. c. Midlands Auditing is never liable to Neighbors Bank under common law. d. Midlands Auditing may be liable to the shareholders of CloudBox Inc. under contract law.

b. Midlands Auditing and CloudBox Inc. have privity of contract.

At a university, IT employees who work in software development and maintenance cannot access professors' grant funding information. This exemplifies which of the following IT general controls? a. Application maintenance b. Network operations c. System maintenance d. Program change

b. Network operations

_______ is a control testing technique in which the auditor watches the control being performed. a. Inquiry b. Observation c. Incorrect acceptance d. Reperforming

b. Observation

Every month the vice president of finance of Edison Construction Company compares how each division's actual expenses compare with budgeted expenses. What type of control activity is being implemented at the company? a. Physical controls b. Performance reviews c. Authorization controls d. Information-processing controls

b. Performance reviews

During the audit of Vanilla Corp, the auditors discovered a material weakness in the accounts payable department. Which of the following would the auditors address to the management? a. Report the material weakness to the public. b. Prepare a management letter. c. Report the weaknesses in the Auditors Report on ICFR. d. Notify the PCAOB.

b. Prepare a management letter.

All of the following are objectives of internal control EXCEPT a. Compliance. b. Profitability. c. Reporting. d. Operations.

b. Profitability.

Tenisha Robertson has audited Live Long Supplements Corp., a public company, for the past two years. If Tenisha agrees to also perform bookkeeping services for Live Long, under which law is she liable? a. The Securities Act of 1934 b. The Sarbanes-Oxley Act of 2002 c. The Securities Act of 1933 d. The Foreign Corrupt Practices Act of 1977

b. The Sarbanes-Oxley Act of 2002

Sweta has been aspiring to be a CPA. She has enough college credits and has passed the 4 parts of the exam. What else is required of her? a. Five years of work experience under the supervision of a licensed CPA. b. Two years of work experience under the supervision of a licensed CPA. c. An MBA in accounting. d. A senior leadership role in the current employment.

b. Two years of work experience under the supervision of a licensed CPA.

An independent practitioner asked to report on the integrity of financial forecasts and management assessments of reporting processes would be providing _______ services. a. ICFR b. attestation c. audit d. compliance

b. attestation

In the way the SASs are numbered, the "C" in the abbreviation AU-C notates the _______ standards. a. content b. clarified c. current d. control

b. clarified

Which of the following describes a person who is in a position to potentially influence attest decisions or the outcome of an attest engagement? a. coercive b. covered c. compromised d. conflicted

b. covered

According to the Principles Underlying An Audit Conducted in Accordance with Generally Accepted Auditing Standards, these responsibities belong to the auditors. Which responsibility does not belong to the auditor? a. having appropriate competence and capabilities to perform the audit. b. planning audits to be efficient and profitable. c. complying with relevant ethical requirements. d. maintaining professional skepticism and exercising professional judgment.

b. planning audits to be efficient and profitable.

If transactions are given identification numbers, the transaction file can be tested for sequence as a form of ________ control. a. verification b. processing c. output d. input

b. processing

The audit firm of Baker and Sanchez takes on an audit that they cannot reasonably complete with the skill level and expertise among its staff. This is a violation of a. planning and supervision. b. professional competence. c. due professional care. d. sufficient relevant data.

b. professional competence.

With regard to expressing whether the company maintained effective ICFR for the period under audit, auditors are only required to obtain a. due diligence defense. b. reasonable assurance. c. proportionate liability. d. audit strategy.

b. reasonable assurance.

Computer general controls pertain to the IT environment and all IT activities as opposed to ___________________. a. applications b. single IT application c. multiple IT applications d. IT applications

b. single IT application

Which is an example of scienter? a. A CPA settles a meritless liability claim outside of court b. A CPA is convicted under the authority of Sarbanes-Oxley c. A CPA chooses to omit key facts from an audit report d. A CPA prepares an objective conclusion about a company's internal controls

c. A CPA chooses to omit key facts from an audit report

Which is the reason that a financial statement audit enhances the quality of financial information? a. Assures users that the financial statements are free of fraud b. Confirms that all financial data is fairly represented c. Adds credibility to the financial statements d. Guarantees the accuracy of the financial statements

c. Adds credibility to the financial statements

During an audit of Olivia's Baked Goods, a public company, the financial statements were not found to be presented fairly and should not be relied upon. Which type of audit opinion should be issued? a. Disclaimer of opinion b. Qualified c. Adverse d. Unqualified

c. Adverse

Which of the following statements is correct regarding analytical procedures? a. Analytical procedures are important to the auditor because they allow the auditors to compare industry standards to the client's performance by analyzing relationships between data, both financial and non-financial. b. Analytical procedures are important to the auditor because they allow the auditors to compare industry standards to the client's performance by analyzing relationships between non-financial data. c. Analytical procedures are important to the auditor because they allow the auditors to compare their own expectations to the client's performance by analyzing relationships between data, both financial and non-financial. d. Analytical procedures are important to the auditor because they allow the auditors to compare their own expectations to the client's performance by analyzing relationships between financial data, but not non-financial data.

c. Analytical procedures are important to the auditor because they allow the auditors to compare their own expectations to the client's performance by analyzing relationships between data, both financial and non-financial.

Which statement below best describes the relationships between assurance, attestation, and audit? a. Attestation services include both audit and assurance services. b. Assurance is a type of attestation service. c. Attestation is a type of assurance service. d. Attestation services are a type of audit service.

c. Attestation is a type of assurance service.

Robert is a manager for Green Industries. His performance is assessed based upon the company's financial performance. Which of the following represents the main reason why financial statement users might demand an audit? a. Complexity b. Timeliness c. Competing incentives d. Reliability

c. Competing incentives

The auditors identify a material weakness in testing accounts receivable during the interim. What is the best course of action for management to do? a. Correct the material weakness after year-end and focus on other controls that the auditors will inspect. b. Perform another control testing. c. Correct the material weakness on accounts receivable, and the management and auditors would test the controls again before year-end. d. Provide an adverse opinion on the financial statements.

c. Correct the material weakness on accounts receivable, and the management and auditors would test the controls again before year-end.

A software application that matches the sales invoice date with the accounting period in which goods are shipped addresses which of the following key assertions? a. Completeness b. Accuracy c. Cutoff d. Occurrence

c. Cutoff

Kelvon Greene is interested in the pension funding of Game Time Entertainment, Inc. Kelvon is most likely which type of financial statement user? a. Customer b. Lender c. Employee d. Investor

c. Employee

If audit risk is set at low, inherent risk is low, and control risk is low, what should auditors set for detection risk? a. Medium b. Very low c. High d. Low

c. High

Lisa is auditing a private company that manufactures batteries for cell phones. While the company has good perpetual inventory records and careful inventory controls, Jennifer is concerned about reported problems with lithium-ion battery fires. It is not clear that the industry has solved these problems. The company has already noted a slowing in sales of one battery model. Which audit strategy or strategies is Lisa most like to take? I. Analytical approach II. Substantive approach III. Reliance approach a. III only b. I only c. II only d. II and III

c. II only

Which of the following is the best synthesis of a CPA's response to learning that her brother has just been appointed CFO of the firm she has been asked to audit? a. Identifies the familiarity threat and any others, evaluates individually and aggregately with other CPAs that the threat is significant, puts safeguards in place and accepts the engagement b. Identifies the familiarity threat and any others, decides the threat is insignificant and accepts the engagement c. Identifies the familiarity threat and any others, evaluates individually and aggregately with other CPAs that the threat is significant, puts safeguards in place, evaluates that the safeguards are unacceptable and declines the engagement d. Identifies the advocacy threat and any others, decides the threat is insignificant and accepts the engagement

c. Identifies the familiarity threat and any others, evaluates individually and aggregately with other CPAs that the threat is significant, puts safeguards in place, evaluates that the safeguards are unacceptable and declines the engagement

Which statement does NOT meet the requirements of an audit opinion? a. opinion provides reasonable assurance. b. opinion is not a reflection of how effectively management is performing its role of running the company. c. auditor's opinion on the financial statements is meant to be a predictor of the future success of the company. d. auditor's opinion is a report on whether the financial statements are fairly presented in accordance with the applicable financial reporting framework.

c. auditor's opinion on the financial statements is meant to be a predictor of the future success of the company.

The limitations of internal controls are often mitigated by other controls, often referred to as ________ controls. a. manual b. authorization c. compensating d. physical

c. compensating

Unauthorized access to data can occur when a. there is sufficient security or poor password protection procedures. b. people have permission to access. c. data is being entered that can be lost or distorted. d. application software is not being used that can result in either fraud or misstatements in the financial statements.

c. data is being entered that can be lost or distorted.

Under the Truth in Securities Act, one of the principal effects on the parties involved in a suit is that the plaintiff a. needs to establish that his/her loss resulted in whole or in part from causes other than the false or misleading statements. b. must prove that the auditors were negligent or fraudulent in certifying the financial statements. c. does not have to prove reliance on the false or misleading statement. c. does not have to base the claim on an alleged materially false or misleading financial statement contained in the registration statement.

c. does not have to prove reliance on the false or misleading statement.

Performance materiality at the individual account level should be less than the _________ materiality. a. qualitative b. quantitative c. planning d. projected

c. planning

In an unqualified audit report on the financial statements of a public company, the _______ paragraph includes an explicit statement that PCAOB audit standards were followed since it is a public company. a. management's responsibility b. introductory c. scope d. opinion

c. scope

All of the following statements are true regarding system software acquisition, change and maintenance controls EXCEPT a. these controls relate to computer software that is designed to operate and control the computer hardware and to provide a platform for running application software. b. if system software is subject to unauthorized changes or poor maintenance, there is an increased risk that computer application controls will not function as designed. c. these controls address the segregation of duties within the IT department and between IT and user departments. d. these controls focus on both acquiring new operating systems and ensuring the integrity of operating systems over time .

c. these controls address the segregation of duties within the IT department and between IT and user departments.

Which item is NOT a type of modified audit opinion? a. adverse. b. disclaimer. c. unqualified. d. qualified.

c. unqualified.

Brianwood Co. outsourced its payroll processes to Axis Co. Brianwood Co. has hired a CPA firm to audit its financial statements. Brianwood Co. and Axis Co. are referred to as the ____ and the _____, respectively. a. user auditor; service organization b. service organization; user entity c. user entity; service organization d. service organization; user auditor

c. user entity; service organization

In which of the following situations should a disclaimer of opinion be issued? a. An auditor is independent and can express an opinion. b. Financial statements are presented fairly and true with no material departures. c. The financial statements are not presented fairly and should not be relied upon. d. An auditor is not independent.

d. An auditor is not independent.

Which section of the CPA exam contains written communication items? a. Financial Accounting and Reporting (FAR) b. Auditing and Attestation (AUD) c. Regulation (REG) d. Business Environment and Concepts (BEC)

d. Business Environment and Concepts (BEC)

Which of the following statements is incorrect regarding internal controls? a. Even though internal controls may be considered effective, it does not mean they will prevent all misstatements or errors from affecting the financial statements. b. Even an effective system of internal controls over financial reporting will only provide reasonable assurance, not absolute assurance, that financial statements are free from material misstatement. c. If internal controls are effective, then it is more likely that the financial statements will be free of material misstatements and errors. d. Effective internal controls over financial reporting provides no assurance regarding the reliability of financial reporting and the preparation of financial statements for internal purposes.

d. Effective internal controls over financial reporting provides no assurance regarding the reliability of financial reporting and the preparation of financial statements for internal purposes.

Internal controls may be implemented at each of the following levels, EXCEPT a. Entity level. b. Operating unit level. c. Function level. d. Executive level.

d. Executive level.

As part of her controls testing, Tenisha has scheduled a meeting with the insurance company's financial operations director to determine the standards put in place to ensure that bank reconciliations are prepared accurately and efficiently. What type of controls testing is Tenisha practicing? a. Observation b. Reperformance c. Inspection of physical evidence d. Inquiry

d. Inquiry

Aarav is an employee of HLC Building, Co. He is currently evaluating and improving risk management for the construction division. Which type of audit is Aarav most likely working on? a. Operational audit b. Financial statement audit c. Compliance audit d. Internal audit

d. Internal audit

If audit risk is set at low, inherent risk is high, and control risk is high, what should auditors set for detection risk? a. High b. Very low c. Medium d. Low

d. Low

Which of the following descriptions best captures the term "profit margin"? a. Measures whether a seller of goods has sufficient markup on goods sold to pay other expenses b. Measures the ability to generate income from average investment in total assets c. Measures the ability to generate income from funds invested by common stockholders d. Measures the profitability of a company after accounting for all operating expenses

d. Measures the profitability of a company after accounting for all operating expenses

Which of the following statements is true regarding observation? a. Observation provides evidence that the procedures observed have been applied consistently throughout the period under audit. b. Observation is an ineffective audit procedure. c. Auditors cannot determine whether there is evidence that the procedures observed have been applied consistently throughout the period under audit. d. Observation only provides evidence of a process at the time auditors observe it being carried out.

d. Observation only provides evidence of a process at the time auditors observe it being carried out.

Which of the following statements regarding the AICPA Code of Professional Conduct is INCORRECT? a. The principles are not enforceable. b. The Code consists of principles, rules, interpretations, and other guidance for AICPA members. c. The principles express the basic tenets of ethical conduct and provide the framework for the rules that govern the performance of a member's professional responsibilities. d. The Code provides guidance only to members with respect to performance of their professional responsibilities.

d. The Code provides guidance only to members with respect to performance of their professional responsibilities.

Which of the following statements is most correct regarding the audit opinion? a. The audit opinion certifies the absolute accuracy of the financial statements. b. The audit opinion predicts the future success of the company. c. The audit opinion reports whether the financial statements are fairly presented in accordance with auditing standards. d. The audit opinion is not a reflection of how management is performing.

d. The audit opinion is not a reflection of how management is performing.

Bob Alvarez works for Higher Ed University. The Dean of Higher Ed University just announced the "good news" that the auditors gave their highest rating on the financial statements and so the University was in great financial condition. Which of the following is the most likely unrealistic expectation in this example? a. The audit is providing complete assurance. b. The auditor will definitely find any and all fraud. c. The auditor has checked all transactions. d. The auditor is guaranteeing the future viability of the entity.

d. The auditor is guaranteeing the future viability of the entity.

Which of the following is a risk associated with the installation of a new IT system? a. Contract out services b. Data will not be lost or corrupted when transferring information from an existing system to the new system. c. The new system will process data appropriately. d. The system may not be appropriate for the client and its reporting requirements.

d. The system may not be appropriate for the client and its reporting requirements.

All of the following are cases related to criminal liability for auditors EXCEPT a. ESM Government Securities v. Alexander Grant & Co. (1987). b. United States v. Simon (1969). c. HealthSouth (2003). d. Ultramares Corp. v. Touche (1931).

d. Ultramares Corp. v. Touche (1931).

The firm of Schultz and Gleason takes on the audit of Bagel Bakers, which they cannot reasonably expect to complete with their skill level. This is most likely a violation of a. planning and supervision. b. sufficient relevant data. c. due professional care. d. professional competence.

d. professional competence.

If the risk of material misstatement is low, auditors should use the a. substantive approach. b. fraud risk approach. c. detection approach. d. reliance on controls approach.

d. reliance on controls approach.

Imagine you are a CPA on an audit engagement for Ace Communications. You are approached by the client who tries to pressure you to drop your request to write down asset values. This is an example of a(n) a. adverse interest threat. b. management participation threat. c. advocacy threat. d. undue influence threat.

d. undue influence threat.

If audit risk is set at 5%, inherent risk is 100% and control risk is 80%, what should auditors set for detection risk? a. 6% b. 12% c. 5% d. 10%

a. 6%

Which of the following best exemplifies the incentives and pressures to commit a fraud and the opportunities to perpetrate it? a. A significant decline in demand for the client's products or services is an example of incentives and pressures faced by client personnel to commit a fraud. However, this example in no way indicates that a fraud has definitely occurred. b. The existence of opportunities to commit a fraud does not mean that fraud has definitely occurred. Nonetheless, auditors must use professional skepticism given that the responsibility for preventing and detecting fraud rests on the auditors. c. A high volume of transactions close to year-end is an example of incentives and pressures faced by client personnel to commit a fraud. Hence, auditors should be skeptical and assume that a fraud has occurred. d. If there are opportunities to commit a fraud, auditors must assume a fraud has been committed. Hence, auditors must use professional skepticism to assess each opportunity in the context of other risk indicators and consider available evidence thoroughly.

a. A significant decline in demand for the client's products or services is an example of incentives and pressures faced by client personnel to commit a fraud. However, this example in no way indicates that a fraud has definitely occurred.

Management of a fast food restaurant determines that new payroll software should be used. This exemplifies which of the following IT general controls? a. Application system acquisition b. Data center c. Application maintenance d. Access

a. Application system acquisition

When an independent practitioner is hired to report on the integrity of financial statements, which may include financial forecasts or reports on financial reporting processes, it is considered what type of service? a. Attestation b. Integrity c. Assurance d. Audit

a. Attestation

Which is the information used by the auditor as the support for the auditor's opinion? a. Audit evidence b. Audit report c. Audit list d. Audit program

a. Audit evidence

Among situations that could cause auditors to issue a modified opinion, which of the following is a case of pervasively material scope limitations? a. Auditor was not able to gather sufficient appropriate evidence and cannot express an opinion on the financial statements. b. Financial statements are not presented fairly and should not be relied upon. c. Financial statements are presented fairly, except for the auditor's inability to gather evidence for one material item. d. Financial statements are presented fairly, except for the uncorrected departure(s).

a. Auditor was not able to gather sufficient appropriate evidence and cannot express an opinion on the financial statements.

Which of the following is the best synthesis of the principles of professional skepticism and professional judgment? a. Auditors should apply their experience in determining whether the financial information provided to them is complete and accurate. b. Auditors provide an independent opinion that is not guided by the interests of the company. c. Auditors are expected to provide a professional opinion on whether the company has provided enough information. d. Auditors should conduct an audit in accordance with the appropriate auditing standards.

a. Auditors should apply their experience in determining whether the financial information provided to them is complete and accurate.

Which certification represents the only licensed accounting professionals in the United States? a. CPA b. CIA c. CFE d. CMA

a. CPA

Which of the following is an example of fraudulent financial reporting? a. Capitalizing items that should be expensed b. Unauthorized discounts or refunds to customers c. Writing checks to fictitious vendors d. Using a company credit card for personal use

a. Capitalizing items that should be expensed

A client of yours is testing a new software program, designed by its own staff. Which of the following is NOT a risk involved with testing this new software program? a. Client staff are adequately trained to use the new system effectively. b. The new system does not process data appropriately. c. Data may be lost or corrupted when transferring information from an existing system to the new system. d. The system may not be appropriate for the client and its reporting requirements.

a. Client staff are adequately trained to use the new system effectively.

Lindsay Yeaster is concerned about the significant estimates used by one of her lending clients. Lindsay has requested that her client provide her with audited financial statements to help assess their creditworthiness. Which of the following sources of demand for audit and assurance services is Lindsay is most likely concerned with? a. Complexity b. Competing incentives c. Reliability d. Remoteness

a. Complexity

Auditors can assess the adequacy of their client's closing procedures in a number of ways. Which is one of the best ways that an auditor can assess that a company's closing procedures were done correctly? a. Conduct a comparison to make sure the company's annual revenue and earnings were in line with prior-year or quarterly or monthly periods. b. Compare a list of management's closing procedures with a copy of the company's closing procedures in prior years. c. Conduct a comparison against the industry averages for revenue and earnings. d. Make sure that management's order to override the company's internal controls was justified.

a. Conduct a comparison to make sure the company's annual revenue and earnings were in line with prior-year or quarterly or monthly periods.

In comparing a company's account balances, which of the following is the auditor generally NOT concerned with? a. Current year versus the next year b. Current year versus the industry average c. Current year versus the average of years over the past 10 years d. Current year versus the previous year

a. Current year versus the next year

Compared to industry averages, which of the following represents a potential concern regarding solvency? a. Debt-to-equity ratio (Entity 1.2; Industry .60) b. Current ratio (Entity 1.7; Industry 2.0) c. Inventory turnover in days (Entity 64 days; Industry 61 days) d. Receivables turnover in days (Entity 28 days; Industry 26 days)

a. Debt-to-equity ratio (Entity 1.2; Industry .60)

If the differences of opinion are not resolved after discussing concerns with the supervisor, what should a CPA do? a. Discuss the concern with the appropriate higher level(s) of management within the CPA's firm. b. Consult an attorney. c. Discuss the concern with a colleague for a piece of advice. d. Discuss the concern with the client.

a. Discuss the concern with the appropriate higher level(s) of management within the CPA's firm.

Assume you are an auditor on an engagement for Treadway Industries and you believe the allowance for doubtful accounts is inadequate and should be raised by $250,000. You have gathered data to support this. The CFO believes the allowance is adequate and discusses this with the senior auditor and they agree to raise the allowance by $100,000. You believe that this may result in a material misstatement. Which of the following steps should you take next? a. Discuss your opinion and reasoning with the senior auditor. b. Report your concerns to higher levels of management of your firm. c. Report your concerns to Treadway's Board of Directors. d. Do nothing and accept the decision of the CFO and the senior auditor.

a. Discuss your opinion and reasoning with the senior auditor.

Which is an example of fraud and exemplifies the kind of fraud committed? I. Unrecorded liabilities is part of Fraudulent Financial Reporting II. Recording fictitious sales is part of a Misappropriation of Assets III. Theft of inventory by employees or others is part of a Misappropriation of Assets IV. Using a company credit card for personal use is part of Fraudulent Financial Reporting a. I and III are correct. b. II and IV are correct. c. II and III are correct. d. Only I is correct.

a. I and III are correct.

Bruce Tyler is auditing the controls of his client, Counter Van Co. He needs to document that he was the one who performed the testing of internal controls. Where on the working paper would this be documented? a. In the "Prepared by" section. b. In the "Work performed" section. c. In the "Findings/results of testing" section. d. In the "Purpose of the test" section.

a. In the "Prepared by" section.

Jade is auditing the controls on inventory. He needs to document the manual procedure he did in testing the internal control. Where on the working paper would this be documented? a. In the "Work performed" section. b. In the "Findings/results of testing" section. c. In the "Prepared by" section. d. In the "Purpose of the test" section.

a. In the "Work performed" section.

Mountain Matcha, a maker of beverages, has taken on more debt this year for capital investments as the company expands and opens new stores. As an auditor, you are concerned with the amount of pressure this has placed on senior management. Which of the following is a valid reason for why you might be concerned? a. Inherent risk and potential fraud b. Capital expenditures have increased c. A new plan to cut employee bonuses d. Employee expenditures have increased

a. Inherent risk and potential fraud

When spot-checking information in a database, payroll verifies that no employee has logged more than 31 sick days within any given month. This exemplifies which of the following IT application controls? a. Input control, limit b. Processing control, before-and-after report c. Input control, verification d. Output control, reconciliation

a. Input control, limit

Jerry Drews is interested in the dividend paying capacity of Rico Manufacturing. Jerry is most likely which type of financial statement user? a. Investor b. Customer c. Lender d. Supplier

a. Investor

Which of the following clients demonstrate a more well-established closing procedure? a. Lola Co. prepares financial statements on a monthly basis. b. GPA Inc closing procedures are being conducted with no adequate oversight. c. Sombi Co. has a history of inaccurate closing procedures from prior periods. d. Narcs Products prepares financing statements only once a year.

a. Lola Co. prepares financial statements on a monthly basis.

During the audit of CleteCorp, auditors determine that the PE and EPS ratios are in decline. What is the auditor's most likely concern in relation to the decline of those ratios? a. Management is under pressure to manipulate earnings. b. The stock price is inflated. c. The company is not solvent. d. The company is not liquid.

a. Management is under pressure to manipulate earnings.

Samwest bank is being audited. The auditor observed that only authorized personnel can access the vault. What type of control is applicable for testing? a. Manual Controls b. None of the answers are correct. c. IT General Controls d. IT Application Controls

a. Manual Controls

Which of the following controls are ineffective? a. Manual follow-up procedures to review exception reports on the access logbook were not done promptly. b. IT application of the client approved a test data that is over the authorized limit. c. The reconciliation procedure for the bank reconciliation corrected itself for the missing entry. d. All controls on the risk assessment are ineffective.

a. Manual follow-up procedures to review exception reports on the access logbook were not done promptly.

During the audit of LEGOND Group, auditors discover a $5,000 understatement of expenses that auditors agreed would not be significant enough to influence a user's decisions. This would most likely be which of the following? a. Neither quantitatively nor qualitatively material b. Qualitatively material c. Both quantitatively and qualitatively material d. Quantitatively material

a. Neither quantitatively nor qualitatively material

During the audit of Angelina's Dolls, the auditors found out that the inventory sitting in Angelina's warehouse is on consignment. Do they meet the rights and obligation assertion and why? a. No, because Angelina's Dolls don't own them. b. Yes, because they physically exist on the company's property. c. Yes, because the inventory count is correct. d. No, because the reported amounts are not correct.

a. No, because Angelina's Dolls don't own them.

Imagine you are involved in an audit engagement and have been tasked with evaluating the risk of sales that may be made without credit approval. You identify a control in which the software application matches the amount of each sales order with a credit authorization on the customer master file. Which of the following key assertions does this control address? a. Occurrence and accuracy b. Accuracy c. Completeness d. Occurrence

a. Occurrence and accuracy

The local bank branch manager approves withdrawal of funds, from a valued client a close friend, despite the check deposit for the funds has not yet cleared. What inherent limitation is exemplified here? a. Overriding or disabling a control within a software program. b. Ineffective understanding of the purpose of control. c. Human error that results in a breakdown in internal control. d. Collusion by two or more individuals to circumvent a control.

a. Overriding or disabling a control within a software program.

During the audit of Family Fitness Co., the auditor determines that he needs to view a copy of a contract for the lease of the building. Where should the auditor look for the document? a. Permanent File b. Management File c. Current File d. Lead Schedule

a. Permanent File

Jackson Best is auditing the cash and cash equivalents of New York Deli. In planning his audit, Jackson applies his training and previous experience while making decisions regarding his results. Which of the following best describes Jackson's responsibility in this scenario? a. Planning and performing the audit with professional judgment b. Ensuring the information included in the financial statements is presented fairly and complies with the applicable financial reporting framework c. Conducting the audit in accordance with appropriate auditing standards d. Planning and performing the audit with professional skepticism

a. Planning and performing the audit with professional judgment

Tomoko Yamaguchi is auditing the accounts receivable of Fashion Enterprises. In planning her audit, Tomoko becomes suspicious of evidence that contradicts inquiries she made of client personnel. Which of the following best describes Tomoko's responsibility in this scenario? a. Planning and performing the audit with professional skepticism b. Ensuring the information included in the financial statements is presented fairly and complies with the applicable financial reporting framework c. Planning and performing the audit with professional judgment d. Conducting the audit in accordance with appropriate auditing standards

a. Planning and performing the audit with professional skepticism

Stephanie took CPE courses in tax laws to be about to provide tax engagements to her clients. This is most likely to follow which general standards? a. Professional competence b. Sufficient relevant data c. Due professional care d. Planning and supervision

a. Professional competence

A high-tech company is looking for a new auditor. The company has grown through an acquisition and needs an auditor that can handle its needs. The company has paid attention to good internal controls, and the new auditor sees no independence issues. Discussions with the previous auditor, the audit committee, and management provide a consistent story about the company and its reasons for changing auditors. However, in the process of acquisition the company became embroiled in a dispute with a regulatory agency. Hence, the new audit company decided to refuse the new client. What is the most important factor contributing to the refusal? a. Risk of association b. Independence issues c. Concerns about management integrity d. Competence issues

a. Risk of association

Ron Cowin, a partner at Cowin & Cowin, CPA is reviewing working papers from a recent audit engagement. His review has taken quite some time due to the extent of audit documentation provided. Additionally, he notes that the staff on the engagement were very experienced and were able to complete the audit within the budgeted time allowed. The documentation being reviewed by Ron most likely relates to a. Ross, Inc. which is one of Cowin's international clients. b. Rocky Industries, a client involved in the manufacture and state-wide delivery of landscaping materials. c. Coconino Daycare Center which is operated by the local community college. d. Shamrock Co. an organic dairy producing a variety of products for regional distribution.

a. Ross, Inc. which is one of Cowin's international clients.

Suits against auditors under the _______ are usually based on Section 11, Civil Liabilities on Account of False Registration Statement, which allows "any person" purchasing or otherwise acquiring the securities to sue when the financial statements are materially misstated. a. Securities Act of 1933 b. Sarbanes-Oxley Act of 2002 c. Securities Act of 1934 d. Foreign Corrupt Practices Act of 1977

a. Securities Act of 1933

Among the following options, who is most likely to send an engagement letter for an audit, and to whom is this letter most likely to be addressed? a. Sent by the auditor, addressed to the audited company's management b. Sent by the audited company's management, addressed to the audited company's treasurer c. Sent by the audited company's treasurer, addressed to the auditor d. Sent by the auditor, addressed to the audited company's treasurer

a. Sent by the auditor, addressed to the audited company's management

Al Greensburg is auditing the cash account for XYZ Enterprises. Al is determining his sample size. Which characteristic of audit evidence is Al concerned with? a. Sufficiency b. Reliability c. Relevance d. Appropriateness

a. Sufficiency

Fun Times designs and sells video games. Recently, they have had problems with liquidity and paying their bills. Which of the financial statement users listed below would be most interested in this information? a. Suppliers b. The general public c. Government d. Customers

a. Suppliers

Which of the following is NOT considered a threat to a CPA's independence? a. The CPA's uncle owns shares of stock in an attest client. b. The CPA's son has a loan from an attest client. c. The CPA's spouse is a joint owner of an apartment building with an attest client. d. The CPA's sister is a member of the board of directors of an attest client.

a. The CPA's uncle owns shares of stock in an attest client.

What distinguishes the performance gap from the expectation gap? a. The auditor is the source of the performance gap, whereas the financial user is the source of the expectation gap. b. The performance gap is a discrepancy from auditing regulations, whereas the expectation gap is a discrepancy from auditing ethical standards. c. The performance gap relates to the current financial position of the audited company, whereas the expectation gap relates to the current condition of the overall economy. d. In the performance gap, an auditor fails to uncover an instance of fraud, whereas in the expectation gap the auditor fails to comply with auditing standards.

a. The auditor is the source of the performance gap, whereas the financial user is the source of the expectation gap.

Which of the following is an unrealistic user expectation relating to the audit expectation gap? a. The auditor will definitely find any and all fraud. b. An unmodified opinion indicates the auditor believes there are no material misstatements in the financial statements. c. The auditor tests a sample of transactions. d. The audit does not guarantee the future viability of the entity.

a. The auditor will definitely find any and all fraud.

A client sells concrete pipe and has a high-voltage fence surrounding the pipe inventory. Inherent risk is low for the assertion of inventory existence because concrete pipe is very heavy and difficult to move. It is unlikely that recorded pipe quantities do not exist. After testing that the security system is working and has been operational throughout the year, the auditor can set control risk low. What is the best alternative for the auditor if one wants to keep audit risk low? a. The auditor will set a high detection risk and spend less time performing audit procedures b. The auditor will set a high detection risk and spend more time performing audit procedures c. The auditor will set a low detection risk and won't spend time performing audit procedures d. The auditor will set a low detection risk and spend less time performing audit procedures

a. The auditor will set a high detection risk and spend less time performing audit procedures

Which of the following examples impairs the appearance of an auditor's independence? a. The auditor's son has a loan from the attest client of his father. b. An older CPA is sometimes biased against new technology companies. c. A large public company sponsors the auditor's favorite sports team. d. A new CPA seeks guidance from a colleague on a complex task.

a. The auditor's son has a loan from the attest client of his father.

Carmel Auditing firm audited the internal controls of Wally Water Resort Incorporated and has issued that the company's internal controls over financial reporting are effective. Which of the following is most likely incorrect? a. The company's internal control prevents all misstatements or errors from affecting the financial statements. b. There is no absolute assurance that the material statements are free from material misstatements. c. More likely, the financial statements are free of errors. d. More likely, the financial statements are free of material misstatements.

a. The company's internal control prevents all misstatements or errors from affecting the financial statements.

Which of the following is least representative of an engagement letter? a. The fertilizer supply client must pay the audit fee prior to receiving the audit report. b. The auditor explains to the fertilizer supply client when various aspects of the audit will be completed. c. The fertilizer supply client provides all necessary information to the auditor. d. The auditor explains the scope of the audit to the fertilizer supply client.

a. The fertilizer supply client must pay the audit fee prior to receiving the audit report.

Which of the following steps in assessing control risk pertains to transaction level controls? a. Understand the flow of transactions. b. Identify the highlights of the financial statement assertions. c. Identify and document controls but doesn't retain for their record. d. Ability to contain and control risk assessment.

a. Understand the flow of transactions.

Walter is an accountant who deals exclusively in tax preparation. While going through a period of slow business, he is approached by a client requiring an audit. Walter decides to accept the job but takes particular care to learn and follow the correct regulations, plan and supervise his services, and gather all the necessary data to provide adequate services. Which of the following is the best synthesis of Walter's story in terms of general standards? a. Walter fails to respect professional competence. b. Walter complies with all of the general standards. c. Walter fails to exercise due professional care. d. Walter fails to obtain sufficient relevant data.

a. Walter fails to respect professional competence.

William Boatright, CPA, is performing an audit of Sweet Treats Company. Which of the following statements is correct regarding IT? a. William is required to gain an understanding of Sweet Treats' IT system, the associated risks, and related controls, regardless of whether Sweet Treats is a public or private company. b. William is required to gain an understanding of Sweet Treats' IT system, the associated risks, and related controls, only if Sweet Treats is a public company. c. William is required to gain an understanding of Sweet Treats' IT system, the associated risks, and related controls, only if Sweet Treats is a private company. d. William is not required to gain an understanding of Sweet Treats' IT system, the associated risks, and related controls, regardless of whether Sweet Treats is a public or private company.

a. William is required to gain an understanding of Sweet Treats' IT system, the associated risks, and related controls, regardless of whether Sweet Treats is a public or private company.

The auditor has pointed out to the client that there is a significant deficiency in their internal control. Does this deserve attention from management? a. Yes, even though it's less severe than a material weakness, numerous significant deficiencies could add up to a material weakness. b. No, significant deficiency would have no effect on the entity's operation to perform in the normal course. c. No, significant deficiency does not lead to a material misstatement of the entity's financial statements. d. No, there is less risk for material misstatement to occur with significant deficiency.

a. Yes, even though it's less severe than a material weakness, numerous significant deficiencies could add up to a material weakness.

Stuart Smally is a member of the Toyco audit team. Stuart has 4 years of experience and performs detail testing. Stuart is most likely a. a senior associate. b. a staff associate. c. a manager. d. a partner.

a. a senior associate.

While auditing an Oil & Gas Manufacturing client, Morales Auditing firm required a petroleum engineer to help them obtain sufficient information for inventory estimates. The petroleum engineer is considered a/an a. auditor's specialist. b. component specialist. c. group engagement partner. d. component auditor.

a. auditor's specialist.

Janet is a young auditor with less experience than Wesley. Janet would like use _______ while Wesley would use_______. a. checklists; flowcharts b. logic diagrams; preformatted questionnaires c. flowcharts; preformatted questionnaires d. flowcarts; checklists

a. checklists; flowcharts

Savannah's new accounting manager approved the posting of sales revenue on April 30th, the financial year-end, for a shipment that was ordered by the customer but not yet delivered. Which of the following assertion is violated in this scenario? a. cutoff b. presentation c. accuracy d. completeness

a. cutoff

Section 404 of the SOX legislation requires that management accept responsibility for the a. design and maintenance of internal controls. b. audit committee. c. work of the external auditors. d. design and maintenance of operational audits.

a. design and maintenance of internal controls.

During the audit of Sleepy Time Blankets, the auditors from Rincon Associates do not properly follow GAAS. This is a violation of a. due professional care. b. sufficient relevant data. c. planning and supervision. d. professional competence.

a. due professional care.

Examples of red flags that indicate potential fraud include all of the following EXCEPT a. employees caught stealing merchandise are promptly dismissed. b. a high turnover of key employees in accounting and finance functions. c. overly dominant management. d. key employees refusing to take leave.

a. employees caught stealing merchandise are promptly dismissed.

It is important that detective controls do all of the following EXCEPT a. prevent all potentially significant misstatements. b. be performed on a consistent and regular basis. c. completely and accurately capture all relevant data. d. include follow-up and correction on a timely basis for any misstatements or issues detected.

a. prevent all potentially significant misstatements.

The board of directors represents the ________ and is responsible for ensuring the company is being run to benefit the a. shareholders; shareholders. b. employees; shareholders. c. shareholders; employees. d. employees; employees.

a. shareholders; shareholders.

The audit expectation gap is caused by unrealistic user expectations. What example would not be included in an unrealistic user expectations? a. the auditor provides reasonable assurance. b. the auditor is guaranteeing the future viability of the entity. c. an unmodified audit opinion is an indicator of complete accuracy of the financial statements. d. the auditor is providing complete assurance.

a. the auditor provides reasonable assurance.

Which inherent limitations does not cause the auditor to be unable to obtain absolute assurance that the financial statements are free of material misstatement? a. the need for professional skepticism. b. the nature of financial reporting. c. the nature of audit procedures. d. the need for the audit to be conducted within a reasonable period of time.

a. the need for professional skepticism.

To ensure that auditors remain independent of their clients, a. there are regulations regarding what type of non-audit services can be provided to audit clients. b. the auditor reports only on whether the financial statements are in accordance with the applicable reporting framework. c. the Big 4 firms operate internationally through a network of affiliate companies and dominate the assurance market throughout the world. d. consulting firms provide assurance services in areas such as website security and environmental sustainability.

a. there are regulations regarding what type of non-audit services can be provided to audit clients.

In an unqualified audit report on the financial statements of a public company, the opinion sentence is _______ the opinion paragraph for the private company audit report. a. virtually identical to b. very different from c. similar to d. somewhat different from

a. virtually identical to

All of the following statements are true regarding IT application controls, EXCEPT they a. will remain uniform from one transaction cycle to the next. b. generally pertain to specific accounting applications. c. execute the function of independent checks. d. are designed to prevent or detect potential misstatements.

a. will remain uniform from one transaction cycle to the next.

What is an example of an audit service? a. A practitioner conducts a review of historical financial statements. b. A certified public accountant (CPA) provides an opinion on whether a financial statement is presented fairly and in accordance with an applicable financial reporting framework. c. A practitioner writes a report about a company's vulnerability to online hackers. d. A professional consults with a company about its future marketing plans.

b. A certified public accountant (CPA) provides an opinion on whether a financial statement is presented fairly and in accordance with an applicable financial reporting framework.

Which of the following is a preventive control in response to the valuation and allocation assertions? a. The account coding on each purchase order is checked by the computer to a table of valid account numbers. b. A computer program will not allow a sale to be processed if a customer has exceeded a credit limit. c. Employees not on the master file list are not allowed to be paid without matching a valid employee ID number to the employee master file and hours worked to an authorized time sheet. d. Sales invoices are automatically priced using information in the price master file.

b. A computer program will not allow a sale to be processed if a customer has exceeded a credit limit.

After testing controls during the audit of a hardware store chain, Alicia identified a control exception which, following further review, she characterized as a material weakness. Which of the following best describes the exception Alicia identified? a. A deficiency where there is more than a remote possibility that any level of misstatement could occur in the financial statements. b. A deficiency where there is more than a remote possibility that a material misstatement could occur in the financial statements. c. A deficiency where there is a remote possibility that any level of misstatement could occur in the financial statements. d. A deficiency where there is more than a remote possibility that a misstatement that is less than material, but still significant, could occur in the financial statements.

b. A deficiency where there is more than a remote possibility that a material misstatement could occur in the financial statements.

Your firm has three offices: Traverse City, MI, Des Moines, IA, and Noblesville, IN. The Traverse City office is auditing Great Fruit Lodge. Which of the following individuals is NOT a covered member with respect to the Great Fruit Lodge audit? a. A partner in the Traverse City office that does not provide services to the Great Fruit Lodge engagement. b. A partner in the Des Moines office that does not provide services to the Great Fruit Lodge engagement. c. The quality review partner for the Great Fruit Lodge engagement. d. The manager on the Great Fruit Lodge engagement.

b. A partner in the Des Moines office that does not provide services to the Great Fruit Lodge engagement.

Which of the following is incorrect regarding working papers? a. Working papers consist of two main files. b. Audit documentation is standard and uniform for all clients. c. Determining what and how much to document is based on professional judgment. d. Auditors document each stage of the audit and the procedures completed.

b. Audit documentation is standard and uniform for all clients.

The following are issued by the Auditing Standards Board of AICPA, except a. Statements on Quality Control Standards. b. Auditing Standards. c. Statements on Auditing Standards. d. Statements on Standards for Attestation Engagements.

b. Auditing Standards.

Which of the following statements regarding a reliance on controls approach is correct? a. If an internal control is not in place, auditors will determine if the control is operating effectively. b. Auditors will usually perform tests of controls during interim testing. c. If results from the tests of controls show the internal control is ineffective, auditors will conclude that control risk is low and overall risk of material misstatement (RMM) is low. d. If detection risk is determined to be high for an account or assertion, the next step is to determine if an internal control is in place to mitigate the risk of a material misstatement.

b. Auditors will usually perform tests of controls during interim testing.

To maximize the efficiency of his current audit of Plains Regional Medical Center, Hunter used evidence from prior audit periods to conclude that existing IT application controls are satisfactory. Which approach did Hunter employ for this component of the medical center's current audit period? a. Control exception b. Benchmarking c. Attribute sampling d. Audit reasoning

b. Benchmarking

Brianwood Co. outsourced its payroll processes to Axis Co. Which of the following statement shows Brianwood Co. has significant controls over the completeness and accuracy of transactions processed by Axis Co.? a. Brianwood approves the total amount of payroll transactions without reviewing. b. Brianwood recomputes a sample of the payroll to make sure it's free from clerical errors. c. Brianwood compares the data with the information they received from competitors. d. Brianwood receives a risk report showing everything is good.

b. Brianwood recomputes a sample of the payroll to make sure it's free from clerical errors.

All of the following factors indicate higher inherent risk EXCEPT a. Technological developments in the client's industry increase the risk of obsolescence of certain assets. b. Client has sufficient working capital and is not at risk of violating loan contracts. c. The client's location is at risk of natural disasters such as hurricanes and flooding. d. Transactions or account balances derived from significant estimates.

b. Client has sufficient working capital and is not at risk of violating loan contracts.

You are hired to audit a private company that does not have an audit committee and does not even have a board of directors. In this situation, what is your best course of action? a. Review the financial documents, and when you're finished with your audit, deliver the results directly to the company's management. b. Communicate with those charged with governance, including those individuals with the responsibility for overseeing the strategic direction of the entity and the obligations related to the accountability of the entity, including the financial reporting process. c. Communicate with those individuals within the company who oversee the strategic direction of the entity, regardless of whether or not they have obligations related to the accountability of the entity. d. Decline the appointment, as it is against the law to not have a board of directors.

b. Communicate with those charged with governance, including those individuals with the responsibility for overseeing the strategic direction of the entity and the obligations related to the accountability of the entity, including the financial reporting process.

An audit firm is approached by four new prospective clients. However, due to limitations regarding its size, the audit firm can only choose one client. Which of the following four clients is most likely to be accepted by the audit firm? a. Company B: 1) Management is preoccupied with meeting specific accounting numbers. 2) The firm does not have expertise needed to provide the full scope of services requested by the client and does not have affiliation with specialists to meet client needs. 3) No independence problems exist, or independence problems can be resolved prior to client acceptance. 4) The client is financially stable and profitable, with no significant concerns about debt covenants. b. Company D: 1) Management shows integrity in business and accounting decisions. 2) The firm has expertise to perform services requested by the client and has access to specialists that can meet client needs. 3) No independence problems exist, or independence problems can be resolved prior to client acceptance. 4) The entity has a strong accounting system with good internal controls. c. Company A: 1) Management shows integrity in business and accounting decisions. 2) The firm does not have expertise needed to provide the full scope of services requested by the client and does not have affiliation with specialists to meet client needs. 3) No independence problems exist, or independence problems can be resolved prior to client acceptance. 4) The client is financially stable and profitable, with no significant concerns about debt covenants. d. Company C: 1) Concerns exist about the integrity of management in business and accounting decisions. 2) The firm does not have expertise needed to provide the full scope of services requested by the client and does not have affiliation with specialists to meet client needs. 3) Independence and conflict of interest issues exist that cannot be resolved prior to client acceptance. 4) The client is financially stable and profitable, with no significant concerns about debt covenants.

b. Company D: 1) Management shows integrity in business and accounting decisions. 2) The firm has expertise to perform services requested by the client and has access to specialists that can meet client needs. 3) No independence problems exist, or independence problems can be resolved prior to client acceptance. 4) The entity has a strong accounting system with good internal controls.

You are in client acceptance phase for the audit of Minemax Manufacturing. You have determined that your firm has the expertise needed to provide the full scope of services requested by the client. Which of the following factors relate to client acceptance in this situation? a. Special circumstances and unusual risks b. Competence c. Independence d. Integrity of management

b. Competence

Gene Cosby is an IRS agent. He is currently gathering evidence regarding the income tax deductions of G&M Operations, Inc. Which type of audit is Gene most likely working on? a. Financial statement audit b. Compliance audit c. Operational audit d. Internal audit

b. Compliance audit

The auditing firm of Garcia and Partners is being sued under common law. The plaintiff purports that the firm was negligent in its performance of the prior year audit. Garcia and Partners purports that the plaintiff did not provide accurate documents during the audit. What defense should Garcia and Partners use? a. Lack of evidence. b. Contributory negligence defense c. Breach of contract d. Due care defense

b. Contributory negligence defense

During the audit of cash for Viable Publishing Co. audit, the auditor determines that he needs to revisit the test work performed on the bank reconciliation. Where should the auditor look for the document? a. Internal Control Questionnaire b. Current File c. Permanent File d. Lead Sheet

b. Current File

When computer programs only process and record data, data input to the system is subject to which of the following controls? a. Input controls b. Data input is not subject to computer application controls in this case. c. Output controls d. Processing controls

b. Data input is not subject to computer application controls in this case.

Which of the following shows weak controls of a user entity over the service entity that they outsourced to provide the service? a. Journal entries using the correct general ledger accounts. b. Employees complained their paychecks have pay discrepancies compared to previous paychecks. c. Financial management reported on from the CFO. d. Payments made through the internal pay provider were not remitted timely to the vendor.

b. Employees complained their paychecks have pay discrepancies compared to previous paychecks.

Which of the following is an example of a compliance objective of internal control? a. Senior project managers regularly justify the need for all employees within their division. b. Employees who work at least 30 hours per week must receive the medical benefits required by law. c. Most companies choose to follow the policies laid out by their board of directors. d. At a yearly meeting, the company president lays out her vision for reducing expenditures.

b. Employees who work at least 30 hours per week must receive the medical benefits required by law.

Each of the following is an integrated component of internal control EXCEPT a. Monitoring activities. b. Enforcement activities. c. Risk assessment. d. Control environment.

b. Enforcement activities.

Which of the following activities is the responsibility of the financial statement preparer? a. Conducting the audit in accordance with the appropriate auditing standards b. Ensuring the information included in the financial statements is presented fairly and complies with the applicable financial reporting framework c. Planning and performing the audit with professional judgment d. Planning and performing the audit with professional skepticism

b. Ensuring the information included in the financial statements is presented fairly and complies with the applicable financial reporting framework

Which assertion relates to the following statement? "Assets, liabilities, and equity interests exist." a. Completeness b. Existence c. Occurrence d. Valuation

b. Existence

Among situations that could cause auditors to issue a modified opinion, which of the following is a case of pervasively material departures? a. Financial statements are presented fairly, except for the auditor's inability to gather evidence for a material item. b. Financial statements are not presented fairly and should not be relied upon. c. Financial statements are presented fairly, except for the uncorrected departure(s). d. The auditor is not independent and cannot express an opinion.

b. Financial statements are not presented fairly and should not be relied upon.

Which of the following is NOT a reason why audit documentation will vary from client to client? a. Audit procedures used b. Fiscal year-end date c. Risks identified d. The extent of judgment used

b. Fiscal year-end date

Which of the following statements is most correct regarding integrated audits? a. Auditors must plan and perform their work to achieve the objectives of the financial statement audit prior to the audit of the effectiveness of ICFR. b. For efficiency purposes, auditors will select audit procedures that allow them to gather evidence that is useful to both of the financial statement and ICFR audits. c. Auditors are required to obtain negative assurance about whether the company maintained effective ICFR for the period under audit. d. Auditors can provide absolute assurance about the effectiveness of internal controls, but they cannot provide absolute assurance on the fair presentation of the financial statements.

b. For efficiency purposes, auditors will select audit procedures that allow them to gather evidence that is useful to both of the financial statement and ICFR audits.

Lynn Wysocki is evaluating the grant proposal for Canton Public Schools. Lynn is most likely a representative of which type of financial statement user? a. Customer b. Government c. Lender d. Investor

b. Government

Which of the following controls requires staff to review the completeness and accuracy of computer-generated information? a. Access controls b. IT-dependent manual controls c. Completeness controls d. Output controls

b. IT-dependent manual controls

When a CPA is presented with a potential threat to their objectivity, what is the most appropriate course of action? a. Identify any threats, evaluate the significance of any existing threats and consult the AICPA Code. b. Identify any threats, evaluate the significance of any existing threats, identify and apply safeguards, evaluate their effectiveness and document action accordingly. c. Identify any threats, evaluate the significance of any existing threats, identify and apply safeguards, evaluate their effectiveness and discuss the results with experienced colleagues. d. Identify any threats, evaluate the significance of any existing threats and rely on the firm's integrity.

b. Identify any threats, evaluate the significance of any existing threats, identify and apply safeguards, evaluate their effectiveness and document action accordingly.

Which of the following statements regarding a substantive approach is correct? a. The process for a substantive approach begins very differently than a reliance on controls approach. b. If there is an internal control in place, auditors may decide to test the effectiveness of the internal control. c. If RMM is low, the audit strategy will be to perform extensive detailed substantive procedures and place little or no reliance on the client's internal controls. d. If there is no internal control in place, auditors assess RMM as low since both inherent and control risk are low.

b. If there is an internal control in place, auditors may decide to test the effectiveness of the internal control.

During a routine audit of the fast-food chain Waffles-N-Syrup, an auditor notices that some of the expenses were incorrectly filed as payroll accounts instead of expense accounts, and as a result payroll taxes were taken out of them and checks were generated. Which type of act has the company committed? a. An auditing malfeasance b. Illegal act, material direct effect c. Legal, non-material direct effect d. Illegal, material but not indirect effect

b. Illegal act, material direct effect

A company that employs freelance editors checks that all freelancers are paid on time, as per the schedule produced by the company's software. This exemplifies which of the following IT application controls? a. Processing control, control total b. Output control, visual scanning c. Input control, verification d. Output control, run-to-run total

b. Output control, visual scanning

A company's CFO understands that failing to report a major financial irregularity to upper management within 5 working days will result in immediate dismissal. This follows which COSO principle? a. Principle 11: The organization selects and develops general control activities over technology to support the achievement of objectives. b. Principle 5: The organization holds individuals accountable for their internal control responsibilities in the pursuit of objectives. c. Principle 8: The organization considers the potential for fraud in assessing the risks to the achievement of objectives. d. Principle 9: The organization identifies and assesses changes that could significantly impact the system of internal control.

b. Principle 5: The organization holds individuals accountable for their internal control responsibilities in the pursuit of objectives.

Senior management analyzes how moving assembly operations from Mississippi to Wisconsin may impact the risk related to reporting responsibilities, given the differences in state laws. This follows which COSO principle? a. Principle 3: Management establishes, with board of directors oversight, structures, reporting lines, and appropriate authorities and responsibilities in the pursuit of objectives. b. Principle 7: The organization identifies risks to the achievement of its objectives across the entity and analyzes risk as a basis for determining how the risks should be managed. c. Principle 14: The organization internally communicates information, including objectives and responsibilities for internal control, necessary to support the functioning of internal control. d. Principle 12: The organization deploys control activities through policies that establish what is expected and procedures that put policies into actions.

b. Principle 7: The organization identifies risks to the achievement of its objectives across the entity and analyzes risk as a basis for determining how the risks should be managed.

Carl Hansen is managing the team assigned to the audit of an insurance company. He has not previously performed an audit for an insurance company and has little knowledge of the industry. Carl has not consulted with others or performed research on the insurance industry. This may likely be a violation of which of the following general standards? a. Due professional care b. Professional competence c. Sufficient relevant data d. Planning and supervision

b. Professional competence

IT staff proposes that only in-house employees should be allowed to update the bank's financial software. This exemplifies which of the following IT general controls? a. Application system acquisition b. Program change c. System change d. Development

b. Program change

In the United States, how do public companies differ from private companies in audit requirements? a. Public companies are required to have an annual integrated audit whereas private companies are required to have an annual financial statement audit. b. Public companies but not private companies are required to have an annual financial audit. c. Public companies but not private companies are required to have an annual integrated audit. d. Public companies are required to have an annual financial statement audit whereas private companies are required to have an annual internal controls over financial reporting (ICFR) audit.

b. Public companies but not private companies are required to have an annual financial audit.

Which of the following refers to the logical connection with the assertion being tested? a. Reliability b. Relevance c. Appropriateness d. Sufficiency

b. Relevance

Laura Baker is auditing the property, plant, and equipment of Smythe Manufacturing. Laura is trying to ensure she obtains evidence provided by original documents rather than copies. Which characteristic of audit evidence is Laura concerned with? a. Appropriateness b. Reliability c. Sufficiency d. Relevance

b. Reliability

Pimentel Corporation has installed a new system to be able to capture and process the travel expenses of their sales personnel. What inherent risk is more likely present? a. Hardware may be stolen as the sales employees travel frequently. b. Sales employees may not be adequately trained to use the new system. c. Fraud could occur in the income statement. d. Data could be released to the public.

b. Sales employees may not be adequately trained to use the new system.

Shawn Johnson is interested in determining whether Fix It Company can pay for the goods it has received. Shawn is most likely which type of financial statement user? a. Investor b. Supplier c. Customer d. Lender

b. Supplier

What distinguishes the AICPA's Auditing Standards Board (ASB) from the PCAOB? a. The ASB enforces auditing standards that the PCAOB issues. b. The ASB issues auditing standards for private and non-profit companies and the PCAOB oversees audits of public companies. c. The ASB maintains the self-regulation of the auditing profession, whereas the PCAOB represents the profession before rule-making bodies. d. The responsibilities of the ASB have been superseded by the PCAOB since the SOX Act.

b. The ASB issues auditing standards for private and non-profit companies and the PCAOB oversees audits of public companies.

Which of the following is most likely an example of a contingent fee? a. The CPA receives one-half of the $2,000 fee at the start of the engagement, and one-half when the engagement is completed. b. The CPA receives a $10,000 fee from the client, only if the client sells their business for more than $500,000. c. The CPA receives a $250 fee from an investment services firm for any successfully referred clients. d. The CPA receives a 10% commission from a software company for any software purchases made by the firm's clients.

b. The CPA receives a $10,000 fee from the client, only if the client sells their business for more than $500,000.

Which of the following statements about auditing standards is correct? a. The auditing standards only provide strict guidelines for the determination of performance materiality. b. The auditing standards do not provide any guidelines for the determination of performance materiality. c. The auditing standards provide limited guidelines for the determination of performance materiality. d. The auditing standards provide rigorous guidelines for determining performance materiality.

b. The auditing standards do not provide any guidelines for the determination of performance materiality.

A client sells high-end fashion clothing and has inadequate security. Inherent risk is high for the assertion of inventory existence because expensive clothing inventory may be stolen. Control risk is high because there is inadequate security, which increases the risk of theft. The auditor cannot rely on the client's security system to reduce the risk of material misstatement associated with the existence of inventory. What is the best alternative for the auditor to keep audit risk low? a. The auditor will set a high detection risk and spend less time performing audit procedures. b. The auditor will set a low detection risk and spend more time performing audit procedures. c. The auditor will set a low detection risk and spend less time performing audit procedures. d. The auditor will set a high detection risk and spend more time performing audit procedures.

b. The auditor will set a low detection risk and spend more time performing audit procedures.

Cynthia Dolores CPA is auditing Nguyen Corporation's financial statements. Cynthia issued an unmodified opinion on the audit report of Nguyen Corporation. Which of the following is false with regards to the opinion expressed by Cynthia? a. The auditor's opinion meant Nguyen Corporation will not file a bankruptcy in the next 5 years. b. The auditor's opinion reflects that Nguyen Corporation is effective in running its operation. c. The auditor's opinion does not reflect that Nguyen Corporation is very good at managing the company. d. The auditor's opinion does not predict that Nguyen Corporation will be very profitable in the future.

b. The auditor's opinion reflects that Nguyen Corporation is effective in running its operation.

The CPA auditing Shen's Cleaning Company failed to discover the fraud that occurred from employee theft and embezzlement of funds. This results in the bond company paying Shen's Cleaning Company for the losses. The bond company sues the CPA firm for failing to discover the fraud. What makes the bond company able to do this? a. The bond company is one of the main parties to a contract and has a right to sue for the breach of the contract. b. The bond company is a subrogee and the CPA's liability for breach of contract extends to them. c. The common law allows the bond company to sue the CPA firm for failure to discover the fraud. d. There is privity of contract between the CPA firm and the bond company.

b. The bond company is a subrogee and the CPA's liability for breach of contract extends to them.

When filing a lawsuit against an auditor under rule 10(b)-5 of the 1934 Securities Act, a plaintiff must prove that a. Damages were not suffered as a result of the reliance on the financial statements. b. The plaintiff relied on the financial statements. c. The financial statements contain an immaterial, factual misrepresentation or omission. d. The auditor had no actual knowledge of the falsity of the representation.

b. The plaintiff relied on the financial statements.

Which of the following statements regarding risk is correct? a. The higher the control risk, the lower the inherent risk is likely to be. b. There is no set relationship between inherent risk and control risk. c. The higher the inherent risk, the lower the control risk is likely to be. d. The higher the inherent risk, the higher the control risk is likely to be.

b. There is no set relationship between inherent risk and control risk.

Suspendus Company has the following financial data for the year ended December 31, 2021: net sales $1,680,000, operating expenses $880,000, net income $104,000, stockholders' equity $800,000, and assets $1,901,000. The information for the year ended December 31, 2020 was: net sales $1,450,000, operating expenses $760,000, net income $87,000, stockholders' equity $700,000, and assets $1,601,000. Calculate the gross profit margin for the year ended December 31, 2021. a. 52.4% b. There is not enough information to answer the question. c. 6.2% d. 47.6%

b. There is not enough information to answer the question.

Marcella Armsburg, CPA, has been offered a fee from her client to be paid only if Marcella is able to get a city penalty waived. Which of the following is true? a. This is prohibited if the client is either an attest or non-attest client. b. This is prohibited if the client is an attest client. c. This is not prohibited for neither attest nor non-attest clients. d. This is prohibited if the client is a non-attest client.

b. This is prohibited if the client is an attest client.

Which of the following principles applies to the observation process? a. Auditors must be diligent to ensure that employees do not falsify information. b. Unique information may be gleaned about how documents are prepared. c. All manual controls must be checked for accuracy. d. Software must be tested to gain assurance that automated controls function properly.

b. Unique information may be gleaned about how documents are prepared.

While auditing Nichols Pharmaceuticals, you believe the allowance for doubtful accounts is inadequate and should be raised by $500,000 and have gathered supporting data. The CFO believes the allowance is adequate and discusses this with your supervisor. They agree to raise the allowance by $200,000. Which of the following best describes if the subordination of judgment threat is at an acceptable level? a. Your supervisor agree.. b. You conclude that the agreement to raise the allowance by $200,000 would not result in a material misrepresentation of fact or a violation of professional standards, laws or regulations. c. You reconsider your position based upon your supervisor's extensive experience. d. Your supervisor and the CFO agree.

b. You conclude that the agreement to raise the allowance by $200,000 would not result in a material misrepresentation of fact or a violation of professional standards, laws or regulations.

The standard on professional competence is clear that a CPA, or an __________ firm, should only undertake professional services that he or she reasonably expects to complete with professional competence. a. financial b. accounting c. legal d. corporation

b. accounting

During the audit of Echo Lab, auditors found that one of the customers was invoice at $2.59/lbs. instead of $2.95/lbs. for 100,000lbs of chemicals. Which assertion is most likely affected? a. existence b. accuracy c. occurence d. completeness

b. accuracy

A similarity between the SEC and the PCAOB is that they both a. regulate the public trading of securities. b. act to protect the interests of investors. c. were established by the Sarbanes-Oxley Act of 2002. d. issue auditing standards that auditing firms must comply with.

b. act to protect the interests of investors.

Section 10(b) and Rule 10b-5 are often referred to as the a. antifraud provisions of the Securities Act of 1933. b. antifraud provisions of the Securities Act of 1934. c. antitrust provisions of the Sarbanes-Oxley Act of 2002. d. antitrust provisions of the Securities Act of 1933.

b. antifraud provisions of the Securities Act of 1934.

The COSO framework considers the relationship between all of the following EXCEPT a. internal control components. b. degree of control exposure. c. organizational structure. d. objectives of internal control.

b. degree of control exposure.

Members of the audit team for Clayton Manufacturing were sloppy in the preparation of audit work papers. They also omitted several required audit procedures. This is a violation of a. planning and supervision. b. due professional care. c. sufficient relevant data. d. professional competence.

b. due professional care.

Which responsibility does not belong to the auditor? a. planning and performing the audit with professional skepticism. b. ensuring the information included in the financial statements is presented fairly and complies with the applicable financial reporting framework. c. conducting the audit in accordance with the appropriate auditing standards. d. planning and performing the audit with professional judgment.

b. ensuring the information included in the financial statements is presented fairly and complies with the applicable financial reporting framework.

Common inherent limitations in internal control include all of the following EXCEPT a. human error. b. government policy. c. collusion. d. ineffective understanding.

b. government policy.

On an audit engagement, the senior associates typically a. outnumber the staff associates. b. have 3-5 years of experience. c. issue the final audit report. d. have ultimate responsibility for audit decisions.

b. have 3-5 years of experience.

Regarding assurance services, the term _______ ensures that practitioners were not involved with the creation of financial information and that they can remain objective. a. intended user b. independent c. quality d. decision maker

b. independent

A similarity between preventive controls and detective controls is that both types of controls are a. put in place to avoid user error. b. intended to result in records that are free of fraud and error. c. types of control that vary widely from client to client. d. applied after transactions have been processed.

b. intended to result in records that are free of fraud and error.

Marcie, a member of the audit team, discovers during a conversation with a client that the marketing agency used by the client is owned by the spouse of the VP of Operations. Recognizing this as a related party relationship, Marcie and the audit team must exercise professional skepticism and identify all of the following risks EXCEPT a. risk that the relationship and related transactions were not properly authorized. b. material risk. c. disclosure risk. d. fraud risk.

b. material risk.

Auditors can be subjected to criminal liability under a. the 1931 b. the 1933 and 1934 Securities Acts. c. the 1934 Securities Act. d. the 1933 Securities Act.

b. the 1933 and 1934 Securities Acts.

All of the following statements about the Foreign Corrupt Practices Act (FCPA) are correct EXCEPT a. through the FCPA, Congress increased the bookkeeping and accounting records requirement of those corporations bound by the 1934 Act. b. the FCPA does not apply to the work of auditors when an integrated audit reports on internal control over financial reporting. c. the FCPA addresses records retention required under the Securities Exchange Act of 1934. d. the FCPA makes bribing foreign officials illegal.

b. the FCPA does not apply to the work of auditors when an integrated audit reports on internal control over financial reporting.

In the audit of private companies, many times the auditor will not begin "year-end" procedures until several weeks after year-end when the client has completed all a. subsequent event procedures. b. year-end closing procedures. c. fraud discovery procedures. d. subsequently discovered fact procedures.

b. year-end closing procedures.

A significant change in the new auditor reporting standard adopted by the PCAOB in 2017 is the inclusion of a statement that says, a. "I don't want you to subordinate your judgment to mine". b. "An audit involves especially challenging, subjective, or complex auditor judgment". c. "We have served as the Company's auditor since [year]". d. "This relates to accounts or disclosures that are material to the financial statements".

c. "We have served as the Company's auditor since [year]".

Which of the following would best meet the requirements of independence for assurance services? a. The Chief Financial Officer for the entity b. An Independent Financial Analyst c. A CPA from Capital City, An Independent Audit and Assurance Services Firm d. The Chairperson for the entity's Audit Committee

c. A CPA from Capital City, An Independent Audit and Assurance Services Firm

What is the difference between a compliance audit and an operational audit? a. A compliance audit is typically conducted by a member of the Institute of Internal Auditors (IIA), whereas an operational audit is typically done by a certified public accountant (CPA). b. A compliance audit is an audit to determine whether the entity has conformed with regulations, rules, or processes, whereas an operational audit is an audit that combines the financial statement audit with an audit of the effectiveness of internal controls over financial reporting (ICFR). c. A compliance audit is an audit to determine whether the entity has conformed with regulations, rules, or processes, whereas an operational audit is an assessment of the economy, efficiency and effectiveness of an organization's operations. d. The function of a compliance audit is determined by those charged with governance and management within the organization, whereas the function of an operational budget is determined by the Internal Revenue Service (IRS).

c. A compliance audit is an audit to determine whether the entity has conformed with regulations, rules, or processes, whereas an operational audit is an assessment of the economy, efficiency and effectiveness of an organization's operations.

Which of the following statements about materiality is correct? a. A higher materiality level will translate to auditors performing more extensive audit procedures to ensure that material misstatements will be detected. b. A lower materiality level will translate to auditors performing less extensive audit procedures to ensure that material misstatements will be detected. c. A lower materiality level will translate to auditors performing more extensive audit procedures to ensure that material misstatements will be detected. d. A lower materiality level will not translate to auditors performing more extensive audit procedures.

c. A lower materiality level will translate to auditors performing more extensive audit procedures to ensure that material misstatements will be detected.

If the material weakness in the control is high, what is the auditor's action on reports on ICFR for public companies? a. Unqualified opinion on ICFR. b. Provide opinion and audit. c. Adverse opinion on ICFR. d. Not provide an opinion.

c. Adverse opinion on ICFR.

Which of the following does NOT describe a reason why blockchain is considered to be highly secure? a. Confidential information is shared only on a need-to-know basis. b. Network members are not allowed to alter or delete a transaction. c. All validated transactions are recorded for five years. d. Consensus is required from all group members.

c. All validated transactions are recorded for five years.

Which of the following distinguishes an audit service from an assurance service? a. Assurance services fall under the umbrella of audit services. b. Assurance services are targeted to financial statement users, whereas audit services are targeted to users of non-financial and historical information. c. An audit service can be provided only by a certified public accountant (CPA), whereas other professionals can provide assurance services. d. An audit service provides an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework, whereas an assurance service provides an opinion on the effectiveness of internal controls over financial reporting (ICFR).

c. An audit service can be provided only by a certified public accountant (CPA), whereas other professionals can provide assurance services.

What is the difference between an integrated audit and a compliance audit? a. Integrated audits are typically done by employees of the organization being audited, whereas compliance audits are usually outsourced to external accounting firms. b. An integrated audit is done on private companies and a compliance audit is done on public companies. c. An integrated audit is an audit that combines the financial statement audit with an audit of the effectiveness of internal controls over financial reporting (ICFR), whereas a compliance audit is an audit to determine whether the entity has conformed with regulations, rules, or processes. d. An integrated audit is an audit to determine whether the entity has conformed with regulations, rules, or processes, whereas a compliance audit combines the financial statement audit with an audit of the effectiveness of internal controls over financial reporting (ICFR).

c. An integrated audit is an audit that combines the financial statement audit with an audit of the effectiveness of internal controls over financial reporting (ICFR), whereas a compliance audit is an audit to determine whether the entity has conformed with regulations, rules, or processes.

Which of the following describes a CPA's best levels of response to dealing with the risks of subordinated judgment? a. Identify whether the objectivity and integrity of the firm has been affected, discuss the issue with your supervisor, disclose your concerns to the media. b. Assess whether a misrepresentation of the facts or a violation of regulation has been made, discuss the issue with your supervisor, disclose your concerns to the media. c. Assess whether a misrepresentation of the facts or a violation of regulation has been made, discuss the issue with your supervisor, present your concerns with appropriate high-level management. d. Identify whether the objectivity and integrity of the firm has been affected, discuss the issue with the respective client, present your concerns with appropriate high-level management.

c. Assess whether a misrepresentation of the facts or a violation of regulation has been made, discuss the issue with your supervisor, present your concerns with appropriate high-level management.

Which of the following would most likely impact auditor performance? a. Economic conditions b. Audit firm independence c. Audit standards d. Audit firm reputation

c. Audit standards

Auditors actions in inquiring about fraud include all of the following EXCEPT a. Auditors inquire the audit committee on their role in fraud prevention and detection. b. Auditors inquire about specific internal controls management has in place. c. Auditors have the ultimate responsibility for preventing and detecting fraud. d. Auditors provide extensive details of the brainstorming session on fraud risk assessment.

c. Auditors have the ultimate responsibility for preventing and detecting fraud.

With regard to setting materiality, which of the following alternatives is best? a. Auditors select an appropriate benchmark using common norms about the client, the client's industry, and the needs of financial statement users for their decision making. However, auditors rely heavily on their professional judgment to determine an appropriate percentage of the selected benchmark. b. Accounting firms may vary in the method they use to set planning materiality in the risk assessment phase as long as the method is well described in the engagement letter. In selecting an appropriate benchmark, auditors can choose an item from the balance sheet or the income statement. And, the benchmark can be changed in the risk response phase. c. Auditors select an appropriate benchmark using their professional judgment and based upon their knowledge of the client, the client's industry, and the needs of financial statement users for their decision making. Moreover, auditors rely heavily on their professional judgment to determine an appropriate percentage of the selected benchmark. d. Auditors select an appropriate benchmark using their professional judgment and based upon their knowledge of the client, the client's industry, and the needs of financial statement users for their decision making. However, when determining an appropriate percentage of the selected benchmark, auditors base their decision on common norms.

c. Auditors select an appropriate benchmark using their professional judgment and based upon their knowledge of the client, the client's industry, and the needs of financial statement users for their decision making. Moreover, auditors rely heavily on their professional judgment to determine an appropriate percentage of the selected benchmark.

Which statement below exemplifies the relationship between independence of an auditor and the proper way to act in the fraud risk assessment process? a. Past experience with the client's management and staff is already an indicative of the current risk of fraud, hence auditors must remain independent of the client, maintain a questioning attitude, and search thoroughly for corroborating evidence from the past to assert about the present. b. Auditors should adopt an attitude of professional skepticism to ensure any indicator of a potential fraud is properly investigated. Auditors must assume that past experience with the client's management and staff is indicative of the current risk of fraud. c. Auditors should adopt an attitude of professional skepticism to ensure any indicator of a potential fraud is properly investigated. This means auditors must remain independent of the client, maintain a questioning attitude, and search thoroughly for corroborating evidence to validate information provided by the client. c. Auditors should not adopt an attitude of professional skepticism to ensure any indicator of a potential fraud is properly investigated, given that by assuming that past experience with the client's management and staff is already an indicator of the current risk of fraud.

c. Auditors should adopt an attitude of professional skepticism to ensure any indicator of a potential fraud is properly investigated. This means auditors must remain independent of the client, maintain a questioning attitude, and search thoroughly for corroborating evidence to validate information provided by the client.

Which of the following best exemplifies the fraud risk assessment process? a. Perpetrators of fraud will try to hide their activities from auditors. However, one thing history tells us is that fraud never successfully maintains. Hence, auditors should just be patient and wait until the fraud is revealed. b. Auditors should directly inquire of audit committee members regarding their role in fraud prevention and detection. However, if the client has an internal audit function, auditors do not need to make inquiries about fraud risk assessment of the internal auditors, given that the responsibility for preventing and detecting fraud rests with client. c. Auditors should directly inquire of the audit committee members regarding their role in fraud prevention and detection. If the client has an internal audit function, auditors should also make inquiries about fraud risk assessment of the internal auditors. d. "Detection" refers to the use of controls and procedures aimed at avoiding a fraud. "Prevention" refers to the use of controls and procedures aimed at uncovering a fraud should one occur.

c. Auditors should directly inquire of the audit committee members regarding their role in fraud prevention and detection. If the client has an internal audit function, auditors should also make inquiries about fraud risk assessment of the internal auditors.

Which of the following statements is incorrect regarding risk assessment? a. An auditor will perform various risk assessment procedures to ensure that appropriate attention is paid to the accounts and transactions most at risk of being materially misstated. b. Auditors make preliminary risk assessments while planning the audit. c. Business risk is the risk that an auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. d. AU-C 300 Planning an Audit and AS 2101 Audit Planning require auditors to plan the audit by assessing risk to reduce audit risk to an acceptably low level.

c. Business risk is the risk that an auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

Jason provides tax services to Thread Corp. while Chris is performing an audit to Sew Inc. Which CPA needs to be independent of their clients? a. Neither Jason nor Chris needs to be independent of their clients. b. Both Jason and Chris need to be independent of their clients. c. Chris, who is performing an audit. d. Jason who provides tax services.

c. Chris, who is performing an audit.

Evergreen Inc. is a publicly traded company that manufactures everything from airplanes to washing machines. Evergreen is currently undergoing an audit. Which of the following groups is LEAST likely to be considered as a beneficiary of the audit? a. Potential investors considering Evergreen Inc. b. Stockholders of Evergreen Inc. c. City of Portland, where the company headquarters are located d. Grand Cascade Bank, which is considering a line of credit for Evergreen

c. City of Portland, where the company headquarters are located

The second dimension of the COSO framework identifies all of the following integrated components EXCEPT a. Information and communication. b. Risk assessment. c. Compliance. d. Control environment.

c. Compliance.

What is the primary difference between conflict of interest and subordination of judgment? a. Conflict of interest never affects the objectivity of a judgment. b. Conflict of interest does not apply to small accounting firms. c. Conflict of interest involves the opposing interests of two clients while subordination of judgment often involves the conflicting interests of colleagues or the accountant with the client. d. Subordination of judgment is always for the best as a more experienced professional makes the final decision.

c. Conflict of interest involves the opposing interests of two clients while subordination of judgment often involves the conflicting interests of colleagues or the accountant with the client.

Which section of the unqualified audit report on the effectiveness of ICFR would the following statement belong in? "Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate". a. Scope paragraph b. Basis for opinion paragraph c. Definition and inherent limitations paragraph d. Opinion paragraph

c. Definition and inherent limitations paragraph

During the audit of JPG Enterprises, you discover that the industry has low risk of technological obsolescence. Which factor that influences inherent risk does this primarily relate to? a. Economy b. Government regulation c. Demand d. Reputation

c. Demand

Luis Shen is deciding what and how much to document is sufficient with his audit for the sales revenue of his client. Which of the following statement is true? a. Documentation is the same for all clients in each industry they operate. Luis should follow the guidelines with competitors. b. Documentation can be a summary data and does not need the details of the step-by-step procedure, as the conclusion provides the result of the documentation. c. Determining what and how much is a matter of professional judgment, that enables an experienced auditor, with no connection with the audit, to understand the procedures and conclusions. d. Documentation includes the use of the current file of the client that contains information that applies to multiple audits.

c. Determining what and how much is a matter of professional judgment, that enables an experienced auditor, with no connection with the audit, to understand the procedures and conclusions.

During the audit of Lange Toys, a private company, the auditors were unable to attend or test the client year-end inventory count. This scope limitation was considered pervasive. Assuming no other issues were discovered during the audit, which type of audit report should be issued? a. Unmodified b. Adverse c. Disclaimer of opinion d. Qualified

c. Disclaimer of opinion

Susan Campbell is an employee of HLC Building, Inc. She is currently evaluating and improving risk management for the construction division. Which type of audit is Susan most likely working on? a. Financial statement audit b. Compliance audit c. Internal audit d. Operational audit

c. Internal audit

Toshiba Corporation is a publicly traded Japanese company headquartered in Tokyo that makes consumer electronics, household electronics, office equipment, and more. In July 2015, the CEO of Toshiba announced he was resigning amid an accounting scandal in which profits had been overstated for the past seven years by approximately $1.9 billion. The technology industry is extremely competitive, and Toshiba's upper management set aggressive profit targets. The home electronics and appliances division was showing losses and the memory chip division was feeling pressure because of decreasing demand from Chinese electronics companies. Overall, there was a lack of internal controls in upper management and an unethical corporate culture led by upper management. Controls that did exist were overridden by upper management's pressure to show profits. Which statement below is an example of opportunities, incentives or pressures to commit fraud that Toshiba faced? a. Lack of internal controls is an example of rationalization to justify a fraud. b. The technology industry being extremely competitive is an example of opportunity to perpetrate a fraud. c. Lack of internal controls is an example of opportunity to perpetrate a fraud. d. An unethical corporate culture led by upper management is an example of incentives to commit a fraud.

c. Lack of internal controls is an example of opportunity to perpetrate a fraud.

Which of the following is an example of a control risk factor? a. Large volume of non-routine transactions in accounts payable b. New accounting guidance for accounting for certain types of revenues c. Lack of segregation of duties in the accounts payable department d. Unique industry accounting practices

c. Lack of segregation of duties in the accounts payable department

Which of the following would most likely impact auditor performance? a. Audit firm independence b. Audit firm reputation c. Legislation d. Economic conditions

c. Legislation

All of the following are operations objectives of the COSO framework EXCEPT a. Operational goals. b. Safeguarding assets against loss. c. Management structure and hierarchy. d. Financial performance goals.

c. Management structure and hierarchy.

Alpha, the auditor reviewing the working papers prepared by Mark, is having a hard time reviewing the working paper for the results of the test of controls for accounts receivable. He reperform the testing but his conclusions were not the same as Mark's. What is most likely the reason? a. Mark is an experienced auditor than Alpha. b. Mark did not state the purpose of the tests of control. c. Mark was not including enough details on the results of the tests of controls. d. Mark included all evidence for the basis of his conclusion.

c. Mark was not including enough details on the results of the tests of controls.

Which of the following statements is correct? a. Members who depart from interpretations of the AICPA Code of Professional Conduct will immediately lose their CPA license. b. Members who depart from the interpretations of the AICPA Code of Professional Conduct shall have the burden of justifying such departure in a letter to the AICPA. c. Members who depart from the interpretations of the AICPA Code of Professional Conduct shall have the burden of justifying such departure in any disciplinary hearing. d. Members can depart from interpretations of the AICPA Code of Professional Conduct without any ramifications.

c. Members who depart from the interpretations of the AICPA Code of Professional Conduct shall have the burden of justifying such departure in any disciplinary hearing.

Molly Morton works at a firm that services clients in her local area, as well as in other locations. Her firm has a significant presence nationally but is not one of the largest firms. Her firm has more than 50 partners. Molly most likely works at which tier firm? a. Regional b. "Big 4" c. Mid-tier d. Local

c. Mid-tier

The audited client has three high-risk areas of material fraud related to cutoff, existence, and occurrence assertion. The other areas of control are of low risk. Do auditors need to test each client control? a. Yes, including all client controls for testing provides a high level of assurance that any weakness will be determined. b. Yes, to ensure all fraud or error will be detected. c. No, only key controls relevant to financial statement assertions and WCGW. d. No, it would be too costly to perform the test on all client controls.

c. No, only key controls relevant to financial statement assertions and WCGW.

Marcus Struthers is on the board of directors for Camp, Inc., however, Marcus is not part of the management team for Camp, Inc. Marcus would be considered which of the following? a. Non-reporting director b. Governance director c. Non-executive director d. Executive director

c. Non-executive director

Which part of the AICPA Code of Conduct would be best suited to the ethical dilemmas of a CPA? a. Preface: Applicable to All Members b. Part 2: Members in Business c. Part 1: Members d. Part 3: Other Members

c. Part 1: Members

Amber Brown is auditing the allowance for doubtful accounts of Plymouth Rubber Processing. In planning her audit, Amber ensures she is independent of the Plymouth Rubber Processing, its management, and its staff when completing the audit work. Which of the following best describes Amber's responsibility in this scenario? a. Conducting the audit in accordance with appropriate auditing standards b. Ensuring the information included in the financial statements is presented fairly and complies with the applicable financial reporting framework c. Planning and performing the audit with professional skepticism d. Planning and performing the audit with professional judgment

c. Planning and performing the audit with professional skepticism

Heins CPA is providing tax services to the client. The lead auditor is making sure he provides proper supervision of the interns when performing work and are following the tax practice standards. Which general standard is being followed by the firm? a. Sufficient relevant data b. Due professional care c. Planning and supervision d. Professional competence

c. Planning and supervision

Latoya Davis has been assigned to manage the audit of a biotechnology company. During the audit, Latoya uses the work of a third-party service provider and gives them the freedom to test what they determine is most useful. This is likely a violation of which of the following general standards? a. Professional competence b. Sufficient relevant data c. Planning and supervision d. Due professional care

c. Planning and supervision

Which of the following best describes the application of relevant training, knowledge, and experience in making informed decisions about the courses of action that are appropriate? a. Professional assurance b. Professional standards c. Professional judgment d. Professional skepticism

c. Professional judgment

A company determines that project managers with annual budgets of more than $2 million are likely to go over budget. Examining the probability of failing to achieve desired goals is which component of internal control? a. Control activities b. Monitoring activities c. Risk assessment d. Control environment

c. Risk assessment

The PCAOB is a non-profit corporation established through the a. Securities and Exchange Act of 1934. b. Securities and Exchange Act of 1933. c. Sarbanes-Oxley Act of 2002. d. Committee on Sponsoring Organizations of the Treadway Commission.

c. Sarbanes-Oxley Act of 2002.

Which section of the unqualified audit report on the effectiveness of ICFR would the following statement belong in? "Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances". a. Basis for opinion paragraph b. Opinion paragraph c. Scope paragraph d. Definition and inherent limitations paragraph

c. Scope paragraph

When a CPA and their supervisor have different opinions regarding application of accounting principles, which type of threats to the CPA's compliance with the integrity and objectivity rule may exist? a. Familiarity threats and Self-interest threats. b. Self-interest threats and Undue influence threats. c. Self-interest threats, Undue influence threats, Familiarity threats. d. Undue influence threats and Familiarity threats.

c. Self-interest threats, Undue influence threats, Familiarity threats.

Which of the following must be reported to those charged with governance? a. Significant deficiency only if there are too many of them b. Significant deficiency only c. Significant deficiency and material weakness d. Material weakness only

c. Significant deficiency and material weakness

You are in client acceptance phase for the audit of Jako Corp. You have determined that Jako has a weak accounting system with few internal controls. Which of the following factors related to client acceptance does this affect? a. Competence b. Independence c. Special circumstances and unusual risks d. Integrity of management

c. Special circumstances and unusual risks

A CPA being contacted about potential disciplinary action or revocation of his or her CPA license would likely hear from which of the following entities? a. FASB b. AICPA c. State board of accountancy d. SEC

c. State board of accountancy

Which of the following is correct regarding the respective phases of an audit? a. Relevant external factors affecting the entity, such as general economic conditions, interest rates, and the availability of finance, should be considered in the Risk Response Phase, because those factors are not inherent to the firm. b. In the Risk Assessment Phase, an auditor will perform various risk assessment procedures to ensure that appropriate attention is paid to the accounts and transactions least at risk of being materially misstated. c. Technological developments should be considered in the Risk Assessment Phase because such technological developments might make particular products obsolete and cause inventory to be more susceptible to overstatement. d. In the Risk Response Phase, an auditor should consider regulatory factors, such as: (1) significant laws, (2) general regulations, (3) industry-specific regulations, (i.e., environmental requirements specific to an industry), and (4) general employment legislation.

c. Technological developments should be considered in the Risk Assessment Phase because such technological developments might make particular products obsolete and cause inventory to be more susceptible to overstatement.

Nguyen CPA firm is offered a contingent fee of $20,000 from their nonattest client, only if the client sells their business for more than $1,000,000. What should the Nguyen CPA firm do? a. The CPA firm should not enter into a contingent fee arrangement from nonattest clients as it will impair their independence. b. The CPA firm should not enter into a contingent fee from nonattest clients as it will impair their professional competence. c. The CPA firm can enter a contingent fee arrangement with nonattest clients as it does not affect their independence. d. The CPA firm can enter a contingent fee arrangement with nonattest clients as it does not affect their professional competence.

c. The CPA firm can enter a contingent fee arrangement with nonattest clients as it does not affect their independence.

Nguyen CPA firm is offered a contingent fee of $20,000 from their attest client, only if the client sells their business for more than $1,000,000. What should the Nguyen CPA firm do? a. The CPA firm can enter a contingent fee arrangement with attest clients as it does not affect their professional competence. b. The CPA firm should not enter into a contingent fee from attest clients as it will impair their professional competence. c. The CPA firm should not enter into a contingent fee arrangement from attest clients as it will impair their independence. d. The CPA firm can enter a contingent fee arrangement with attest clients as it does not affect their independence.

c. The CPA firm should not enter into a contingent fee arrangement from attest clients as it will impair their independence.

Which statement below exemplifies the principle of an advocacy threat? a. The CPA auditing Gower Pharmaceuticals learns his brother has just been hired as CFO of the company. b. A new auditing firm gets its first client after 6 months. c. The CPA testifies as an expert witness for the client in a multi-million-dollar licensing case. d. The CPA audited the same firm three years earlier.

c. The CPA testifies as an expert witness for the client in a multi-million-dollar licensing case.

Which of the following is an unrealistic user expectation relating to the audit expectation gap? a. Auditing standards are reviewed and updated on a regular basis to enhance the work being done by auditors. b. The audit does not guarantee the future viability of the entity. c. The auditor is providing complete assurance. d. The auditor tests a sample of transactions.

c. The auditor is providing complete assurance.

On June 1, 2017, the PCAOB adopted a new auditor reporting standard, which included two significant changes to the existing auditor's report. What were they? a. The differing responsibilities of both management and auditors b. The inclusion of both the firm name and location in the signature c. The communication of critical audit matters and the inclusion of auditor tenure d. An opinion paragraph and a paragraph referencing the audit of internal control

c. The communication of critical audit matters and the inclusion of auditor tenure

Which of the following internal control would an external auditor be least primarily concerned about? a. The company putting security measures to safeguard against the theft of the high dollar inventory value. b. The company primarily focused on transparency, reliability, and timeliness in reporting of their financial statements. c. The company following environmental laws about not dumping toxic chemicals into the local community. d. The company focused on achieving operational efficiency in the production department.

c. The company following environmental laws about not dumping toxic chemicals into the local community.

The CPA has an audit client with a very active presence on social media. Which inherent risk is most likely to be considered? a. The client has overspent on the new technology that is not successful. b. The reason client is slow in adapting to new technology. c. The content that is being promoted in social media. d. The client lagging behind competitors in using new technology.

c. The content that is being promoted in social media.

Why is it important that the board of directors have a mixture of executive and non-executive members? a. The executive members are independent of the company and can help to reduce risk, whereas the non-executive members can bring broader topics to the discussion. b. The presence of non-executive members allows auditors to ask questions about the inner workings of the company, whereas executive members can give auditors someone to place the blame on if something goes wrong. c. The executive members have a deeper understanding of the company and its workings, whereas the non-executive members may be better representatives of shareholders and can be more impartial in their strategic decision-making. d. The presence of executive board members helps to reduce the risk of material misstatement because they provide oversight of top-level management decisions, whereas non-executive members have a deeper understanding of the company.

c. The executive members have a deeper understanding of the company and its workings, whereas the non-executive members may be better representatives of shareholders and can be more impartial in their strategic decision-making.

Which of the following is NOT a principal provision for the plaintiff under Section 18(a) of the Securities Act of 1934? a. The plaintiff may be any person buying or selling the securities. b. The plaintiff must prove the existence of a materially false or misleading statement. c. The plaintiff must prove he had no knowledge of the false or misleading statement. d. The plaintiff must prove reliance on such statement and damage resulting from such reliance.

c. The plaintiff must prove he had no knowledge of the false or misleading statement.

Which of the following is an example of an integrated audit? a. Private wholesaler Office Furniture and Supplies decides to have its annual financial statement audited. b. Rock and Gravel Inc. assigns its financial staff to evaluate the company's risk management practices. c. The public company Statewide Water and Electric undergoes an audit of its financial statement and its internal controls over financial reporting (ICFR). d. Sole proprietor Wesley has his consulting company's 2020 tax return audited by the Internal Revenue Service (IRS).

c. The public company Statewide Water and Electric undergoes an audit of its financial statement and its internal controls over financial reporting (ICFR).

How are independent practitioners and certified public accountants (CPAs) similar? a. They can both provide audit services. b. They both can provide an opinion on the effectiveness of internal controls over financial reporting. c. They can both provide attestation and assurance services. d. They both are licensed accounting professionals.

c. They can both provide attestation and assurance services.

You are auditing the financial statements of ChemCom Enterprises. You are concerned that management may override controls when preparing adjusting and allocating entries, due to the immense pressure to meet earnings targets. Who has responsibility for oversight of this process? a. The accounting staff b. The internal audit department c. Those charged with governance d. The auditor

c. Those charged with governance

The client is under pressure to meet profit targets for bonuses. Which of the following is the biggest risk associated with the client's closing procedures? a. Expenses incurred are recorded in the correct accounting period. b. Expenses may be overstated at year-end. c. Unearned revenue is included in the current year's income. d. Revenue is recorded in the correct accounting period.

c. Unearned revenue is included in the current year's income.

The planning materiality threshold for company A is $300 million and auditors decided that one-third of that amount, $100 million, is an appropriate performance materiality threshold at the account level to determine if individual accounts or transactions are materially misstated. Generally, auditors would spend minimal time performing detailed audit testing on all accounts EXCEPT a. Other Investments - $45M. b. Intangible Assets - $40M. c. Valuation Allowance - $50M. d. Property, Plant and Equipment- $50M.

c. Valuation Allowance - $50M.

When planning the controls testing component for his audit of the Coastal Credit Union, which factor should Sanjay examine to identify a potential risk that a control might not be operating effectively? a. No change in key personnel who perform the control or monitor its performance. b. Client reports and key requirements. c. Whether there have been changes in the volume or nature of transactions that might adversely affect control design or effectiveness. d. The degree to which the control relies on the effectiveness risk factors.

c. Whether there have been changes in the volume or nature of transactions that might adversely affect control design or effectiveness.

What is management for a public company of less that $75 Million in market value NOT responsible for? a. reasonable assurance regarding the reliability of financial reporting. b. the design and maintenance of internal controls. c. an audit of the internal controls over financial reporting. d. issuing a report asserting whether internal controls over financial reporting were effective.

c. an audit of the internal controls over financial reporting.

The Escott v. BarChris Construction Corp (1968) case is important in that the court determined that following auditing standards generally accepted in the United States would meet the a. breach of contract defense. b. contributory negligence. c. due diligence defense. d. conclusive defense.

c. due diligence defense.

In the United States, a state board of accountancy issues a license to practice to aspirants who have a. a bachelor's degree and some experience. b. two years of relevant experience. c. earned all three E's: education, exam, and experience. d. passed any three parts of the CPA exam.

c. earned all three E's: education, exam, and experience

Under the Securities Act of 1934 Section 18 suit, James CPA must prove the following a. he acted in good faith and had not committed ordinary negligence in performing the audit. b. he had a reliance on such statements and there is damage resulting from such reliance. c. he acted in good faith and had no knowledge of any misleading statements. d. he had minimum knowledge of the false or misleading statements.

c. he acted in good faith and had no knowledge of any misleading statements.

If a potential misstatement of the financial statements is significant enough to influence or make a difference in the judgment, or consequential activities of a financial statement user, it is considered a. deficient. b. immaterial. c. material. d. fraudulent.

c. material.

If an auditor discovers that a client has violated regulations of the federal Food and Drug Administration that have a material but indirect effect on the financial statements, all of the following are appropriate responses EXCEPT a. consider withdrawing from the audit if management does not respond appropriately. b. perform audit procedures to determine if a contingent liability should be recorded or disclosed. c. report the illegal acts to the appropriate governing authority. d. perform specified audit procedures that may identify noncompliance.

c. report the illegal acts to the appropriate governing authority.

Under the Securities Act of ______, there is a significant burden of proof that rests upon the auditor to show that the audit firm used due diligence in conducting the audit. a. 1930 b. 1932 c. 1934 d. 1933

d. 1933

The Sarbanes-Oxley Act of ______ created the Public Company Accounting Oversight Board (PCAOB), which oversees the audits of public companies. a. 2000 b. 2005 c. 2006 d. 2002

d. 2002

Which of the following items would most likely be considered material to the financial statement user? a. A $1,000 understatement in total revenues of $100,000 that turns a $20,000 profit into a $19,000 profit. b. A $1,000 overstatement in total revenues of $100,000 that turns a $20,000 profit into a $21,000 profit. c. A $1,000 understatement in total revenues of $100,000 that turns a $7,000 loss into a $8,000 loss. d. A $1,000 overstatement in total revenues of $100,000 that turns a $500 loss into a $500 profit.

d. A $1,000 overstatement in total revenues of $100,000 that turns a $500 loss into a $500 profit.

Which statement exemplifies the broad concept of assurance services? a. Independent practitioners pass judgment on whether a company has followed generally accepted accounting principles (GAAP). b. A CPA gives an opinion on the effectiveness of internal controls over financial reporting (ICFR). c. Investors and creditors receive opinions on whether financial statements are presented fairly. d. A professional provides a service that involves improving the quality of information prepared by someone else.

d. A professional provides a service that involves improving the quality of information prepared by someone else.

What distinguishes the AICPA from a state board of accountancy? a. AICPA membership is mandatory, and CPAs licensing by their state board of accountancy is voluntary. b. Both AICPA membership and licensing by a state board of accountancy is voluntary. c. AICPA membership is mandatory, but all CPAs must be licensed by their state board of accountancy. d. AICPA membership is voluntary, but all CPAs must be licensed by their state board of accountancy.

d. AICPA membership is voluntary, but all CPAs must be licensed by their state board of accountancy.

The senior manager overrides the selection to purchase supplies from a supplier who is a close family friend. This is an example of which inherent limitations of internal control? a. Management team is able to control internal audit. b. Ineffective understanding of the purpose of control. c. Decision made by management as to the nature and extent of the control it chooses to implement. d. Ability of management to override internal control.

d. Ability of management to override internal control.

Blackwell Manufacturing is headquartered in Houston, Texas. For which of the following reasons might the city be users of Blackwell's financial statements? a. To determine if Blackwell is paying its fair share of taxes b. To determine if Blackwell is complying with regulations c. To determine how grant funds have been spent d. All of the choices are correct.

d. All of the choices are correct.

How are assurance, attestation, and audit services similar? a. All involve a review of financial statements. b. All can be handled by any professional who has met the educational requirements set by a state board of education. c. All can only be handled by a certified public accountant (CPA). d. All result in a written report about the results.

d. All result in a written report about the results.

Merriwether Corp. is seeking a line of credit for its operations and the bank has requested audited financial statements. The bank wants to hire an independent auditor to conduct the audit, but Merriwether's CFO knows a local accountant that she would like to use. Which of the following describes the best reasoning in selecting the right individual? a. The local accountant is familiar with the company and the area and is in the best position to fairly assess Merriwether's financial statements. b. An auditor will be most interested in helping Merriwether get the loan they are requesting. c. An independent auditor will be certain to conduct an audit that is in Merriwether's best interests. d. An auditor has the training and detailed knowledge to understand technical accounting and disclosure issues necessary to evaluate Merriwether's financial statements.

d. An auditor has the training and detailed knowledge to understand technical accounting and disclosure issues necessary to evaluate Merriwether's financial statements.

What is most similar to an opinion on whether the financial statements are presented fairly, in all material respects, and in accordance with an applicable financial reporting framework? a. An opinion on services performed by an independent practitioner who issues a report on a subject matter that is the responsibility of another party b. An opinion on the licensure process whereby a person qualifies to become a certified public accountant (CPA) c. An opinion on independent professional services that improve the quality of information, or its context, for decision makers d. An opinion on the effectiveness of internal controls over financial reporting (ICFR), which enhances the degree of confidence that intended users can place in the financial statements

d. An opinion on the effectiveness of internal controls over financial reporting (ICFR), which enhances the degree of confidence that intended users can place in the financial statements

A client sells high-end fashion clothing and has inadequate security. Inherent risk is high for the assertion of inventory existence because expensive clothing may be stolen. Control risk is high since there is inadequate security, which increases the risk of theft. The auditor cannot rely on the client's security system to reduce the risk of material misstatement associated with the existence of inventory. What is the best alternative for the auditor to keep audit risk low? a. As the risk of material misstatement is high, the best strategy is the reliance on controls approach. b. As the risk of material misstatement is low, the best strategy is the reliance on controls approach. c. As the risk of material misstatement is low, the best strategy is the substantive approach. d. As the risk of material misstatement is high, the best strategy is the substantive approach.

d. As the risk of material misstatement is high, the best strategy is the substantive approach.

The sales manager of a client reviews a daily report listing each sale invoice and gross margins for each sale. The manager then investigates invoices with unusually high or low gross margins. To test this control, auditors should do which of the following? a. Reform the control on a sample basis. b. Review the accounts and look for initials of the sales manager. c. Ask the client if they have any suggestions. d. Ask the sales manager about what is found and how discrepancies are resolved.

d. Ask the sales manager about what is found and how discrepancies are resolved.

Bob Smith is an intern working on the audit of XYZ Enterprises. What is true regarding the audit working papers Bob prepares? a. Bob should not initial the work paper until the audit is completed. b. Bob should initial the work paper together with the date of the audit report. c. Bob should not initial the work paper until it has been reviewed. d. Bob should initial the work paper together with the date the work paper was prepared.

d. Bob should initial the work paper together with the date the work paper was prepared.

Which of the following statements best fot a CPA? a. CPAs performing compilation services need to remain independent. As such, any lack of independence must be disclosed in the compilation report. b. CPAs performing tax and consulting services do not need to remain independent. However, CPAs performing compilations services must remain independent. c. CPAs performing tax, consulting, and compilation services do not need to remain independent and no disclosure is necessary. d. CPAs performing tax, consulting, and compilation services do not need to remain independent. However, the lack of independence must be disclosed in the compilation report.

d. CPAs performing tax, consulting, and compilation services do not need to remain independent. However, the lack of independence must be disclosed in the compilation report.

The auditor is preparing documentation of internal control of his client. The page is divided into two sections with the process flow on the left-hand side and a description of each step in the flow on the right-hand side. Which form of documentation is most likely the auditor is using? a. Combination of narratives and questionnaires. b. Combination of logic diagrams and flowcharts. c. Combination of logic diagrams and checklists. d. Combination of narratives and flowcharts.

d. Combination of narratives and flowcharts.

Patrick Brown is concerned that management at his largest customer is under immense pressure to meet operating goals. Patrick has requested that his largest customer provide him with audited financial statements to help assess their creditworthiness. Which of the following sources of demand for audit and assurance services is Patrick is most likely concerned with? a. Reliability b. Complexity c. Remoteness d. Competing incentives

d. Competing incentives

As part of the audit of Sparkle Pools, Inc., Emilia Lopez has been assigned to evaluate the risk of sales that may be made without credit approval. She identifies software that matches the amount of each sales order with a credit authorization on the customer master file. The control Emilia identified addresses all of the following key assertions EXCEPT a. Allocation. b. Occurrence. c. Valuation. d. Completeness.

d. Completeness.

Li Na is concerned about the significant and unusual estimates used by one of her lending clients. Li has requested that her client provide her with audited financial statements to help assess their creditworthiness. Which of the following sources of demand for audit and assurance services is Li most likely concerned with? a. Competing incentives b. Reliability c. Remoteness d. Complexity

d. Complexity

Martina Juarez is auditing the inventory of Tecumseh Plastics. Martina references GAAS to help her plan her procedures. Which of the following best describes Martina's responsibility in this scenario? a. Planning and performing the audit with professional skepticism b. Planning and performing the audit with professional judgment c. Ensuring the information included in the financial statements is presented fairly and complies with the applicable financial reporting framework d. Conducting the audit in accordance with appropriate auditing standards

d. Conducting the audit in accordance with appropriate auditing standards

Which of the following is a CPA's best response to identify and apply safeguards? a. Consult applicable rules in the Code and regulations, identify possible client safeguards, resign from the accounting firm b. Consult the client's CFO, identify possible client safeguards, discuss available reassignments within the accounting firm c. Consult the client's CFO, identify possible client safeguards, do not discuss the matter with colleagues d. Consult applicable rules in the Code and regulations, identify possible client safeguards, discuss available reassignments within the accounting firm

d. Consult applicable rules in the Code and regulations, identify possible client safeguards, discuss available reassignments within the accounting firm

A division vice president fires project managers if they exceed 10 percent of their operating budget for their last three projects. This policy illustrates which component of internal control? a. Information and communication b. Risk assessment c. Monitoring activities d. Control environment

d. Control environment

Which of the following is the audit procedure designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level? a. Inquiry testing b. WCGW c. Observation testing d. Control testing

d. Control testing

Which of the following is NOT deployed as an output control? a. Comparison to source documents b. Reconciliation of totals c. Visual scanning d. Control totals

d. Control totals

The audit of Little Town Store has shown a deficiency in the credit management process. Although controls and policies have been in place that new customers to undergo credit checking prior to being able to buy on credit and regular monitoring must take place to evaluate the credit limit, the new credit person in charge is lacking competency to do regular monitoring and evaluation on the credit status of the customers. What kind of internal control weakness is exemplified in this situation? a. Numerous deficiency b. Deficiency in design c. Significant deficiency d. Deficiency in operation

d. Deficiency in operation

What is the difference between earnings per share (EPS) and cash earnings per share (CEPS)? a. Earnings per share shows how much a stockholder is willing to pay per dollar of earnings, whereas cash earnings per share shows how much cash the stockholder is willing to pay for each common share issued. b. Earnings per share shows how much a stockholder is willing to pay per dollar of earnings, whereas cash earnings per share shows the cash flow capacity of a company for each common share issued. c. Earnings per share reflects the earnings return on each common share issued, whereas cash earnings per share shows how much cash the stockholder is willing to pay for each common share issued. d. Earnings per share reflects the earnings return on each common share issued, whereas cash earnings per share shows the cash flow capacity of a company for each common share issued.

d. Earnings per share reflects the earnings return on each common share issued, whereas cash earnings per share shows the cash flow capacity of a company for each common share issued.

Which of the following is considered a preventive control? a. An auditor selects a bank reconciliation and follow-up of unexpected outstanding items. b. A computer program compares all bills of lading with sales invoices. c. Auditors review credit balances in account receivable to determine their causes. d. Employees not on the master file list are not allowed to be paid without matching a valid employee ID number to the employee master file and hours worked to an authorized time sheet.

d. Employees not on the master file list are not allowed to be paid without matching a valid employee ID number to the employee master file and hours worked to an authorized time sheet.

Which of the following is an example of an operations objective component of internal control? a. Each department must have transparent accounting. b. Shareholders are forbidden from any appearance of insider trading. c. Company audits must be conducted by an accredited agency. d. Expenditures over $100 on the company credit card require prior supervisory approval.

d. Expenditures over $100 on the company credit card require prior supervisory approval.

Which of the following are reasons why audit documentation will vary from client to client? a. Methodology utilized b. Clients individual needs c. Judgment used d. Extent of exceptions noted

d. Extent of exceptions noted

Suji Equipment Co. has launched a new branch in Mexico. To speed up the start of business operations, the accounting manager has paid the officials in the city to aid this process. Which statutory law has been violated by the accounting manager? a. SEC ACT of 1934 b. Criminal liability c. Sarbanes-Oxley Act of 2002 d. Foreign Corrupt Practices Act of 1977

d. Foreign Corrupt Practices Act of 1977

Which of the following best summarizes the concepts of Fraudulent Financial Reporting and Misappropriation of Assets with the respective example? a. Fraudulent Financial Reporting is intentionally misstating items or omitting important facts from financial statements. Writing checks to fictitious vendors is an example of Fraudulent Financial Reporting. b. Misappropriation of Assets is an intentional theft of a company's assets by employees. Recording Fictitious Sales is an example of Misappropriation of Assets. c. Misappropriation of Assets is intentionally misstating items or omitting important facts from financial statements. Unauthorized discounts or refunds to customers is an example of Misappropriation of Assets. d. Fraudulent Financial Reporting is intentionally misstating items or omitting important facts from financial statements. Recording fictitious sales is an example of Fraudulent Financial Reporting.

d. Fraudulent Financial Reporting is intentionally misstating items or omitting important facts from financial statements. Recording fictitious sales is an example of Fraudulent Financial Reporting.

Which of the following describes a compliance audit? a. An audit that combines the financial statement audit with an audit of the effectiveness of ICFR b. A function within an entity that evaluates and improves risk management, internal controls, and governance c. Concerned with the economy, efficiency, and effectiveness of an organization's activities d. Gathering evidence to determine whether the person or entity under review has followed applicable rules, policies, procedures, laws, and regulations

d. Gathering evidence to determine whether the person or entity under review has followed applicable rules, policies, procedures, laws, and regulations

If a public company has even one material weakness in internal control, the company will receive an adverse opinion on _______. a. IFRC b. IRCF c. IFCR d. ICFR

d. ICFR

Olivia Kline is interested in the creditworthiness of Davidson Security Services. Olivia is most likely which type of financial statement user? a. Customer b. Investor c. Supplier d. Lender

d. Lender

If audit risk is set at low, inherent risk is medium, and control risk is high, what should auditors set for detection risk? a. Very low b. Medium c. High d. Low

d. Low

Rajesh is involved in an audit for a retail flower shop that has relatively simple accounting systems and transaction flows. Which method will Rajesh likely use to document the client's internal controls? a. Flowcharts and logic diagrams b. Combination of narratives and flowcharts c. Checklists and preformatted questionnaires d. Narratives

d. Narratives

A new auditor prepared accounts receivable confirmation request to be sent to the customer. He mentioned in the letter to only reply if the information presented is not the same as your records. Is this a preferred type of confirmation to send? a. Yes, to reduce all the unnecessary responses from customers that already have agreed on amounts. b. No, because the customer might not place too much attention to the request. c. Yes, because this is just a check procedure and most data from the client's file are reliable. d. No, there is a risk that the client never received the confirmation.

d. No, there is a risk that the client never received the confirmation.

Which of the following works to ensure that processing results are correct and that only authorized personnel receive the results? a. Processing controls b. Input controls c. Access controls d. Output controls

d. Output controls

To what entity did the Sarbanes-Oxley Act give authority to establish auditing standards, quality control standards, and independence standards for auditors of public companies. a. FASB b. IRS c. GASB d. PCAOB

d. PCAOB

A major stockholder paying back a loan at period end, and the company lending the same amount of money back to the stockholder shortly after the quarter ends, is an example of which of the following? a. Cooking the books b. Misappropriation of assets c. Embezzlement d. Period-end window dressing

d. Period-end window dressing

Which of the following statements is correct regarding the issuance of audit standards? a. The ASB is currently responsible for issuing audit standards for the audits of public and private companies. b. Prior to the creation of the ASB, the PCAOB was responsible for issuing audit standards that were used for the audits of public and private companies. c. The PCAOB is currently responsible for issuing audit standards for the audits of public and private companies. d. Prior to the creation of the PCAOB, the ASB was responsible for issuing audit standards that were used for the audits of public and private companies.

d. Prior to the creation of the PCAOB, the ASB was responsible for issuing audit standards that were used for the audits of public and private companies.

Which of the following examples would NOT be prohibited under independence rules? a. The father of a covered member working as CEO of the attest client b. Spouse of a professional employee of an accounting firm who is not a covered member holding a position of an officer for the client's pension fund c. Professional employee of an accounting firm who is not a covered member holding a position on the board of directors of an attest client d. Professional employee of an accounting firm who is not a covered member holding 3% of shares in an attest client

d. Professional employee of an accounting firm who is not a covered member holding 3% of shares in an attest client

During an audit of Bruce Delivery, Co., a public company, the financial statements were found to be presented fairly, except for the auditor's inability to gather evidence for a material item. Which type of audit opinion should be issued? a. Adverse b. Disclaimer of opinion c. Unqualified d. Qualified

d. Qualified

During the audit, Pablo was adding the columns of depreciating expense and checking the formulas to make sure there are no errors. What type of audit procedure is Pablo doing? a. Observation b. Inquiry c. Reperformance d. Recalculation

d. Recalculation

Which of the following financial statement users would be most interested in whether Whittaker Products can pay the interest of the loan extended to them? a. City of Vogelweh Tax Office b. The general public c. Tan Chemicals, supplier of raw materials. d. Seacoast Bank

d. Seacoast Bank

What would happen to Roxanne, a CPA candidate who passed the first part of the Uniform CPA Exam in March 2020 but failed the second part in July 2020? a. She would have to find another line of work. b. She could take the second part of the test in another state and hope that its second part is easier than in the original state. c. She would have to wait 18 months to start over and retake part one of the test. d. She would have until September 2021 to pass the second as well as the third and fourth parts of the exam.

d. She would have until September 2021 to pass the second as well as the third and fourth parts of the exam.

Jack Leung is the auditor of Sun Tower Energy. If the company's internal control over financial reporting is found to be ineffective despite Jack's attestation, under which statutory law is he liable? a. The Securities Act of 1934 b. The Sarbanes-Oxley Act of 2002 c. The Securities Act of 1933 d. The Foreign Corrupt Practices Act of 1977

d. The Foreign Corrupt Practices Act of 1977

Jack Leung is the auditor of Sun Tower Energy. If the company's internal control over financial reporting is found to be ineffective despite Jack's attestation, under which statutory law is he liable? a. The Securities Act of 1934 b. The Securities Act of 1933 c. The Sarbanes-Oxley Act of 2002 d. The Foreign Corrupt Practices Act of 1977

d. The Foreign Corrupt Practices Act of 1977

Monica Alvarez recently completed an audit for Paragon Manufacturing. When Paragon is placed under federal investigation, law enforcement officials discover Monica shredding the company's financial documents in her office. Under which statutory law is Monica liable? a. The Foreign Corrupt Practices Act of 1977 b. The Securities Act of 1933 c. The Securities Act of 1934 d. The Sarbanes-Oxley Act of 2002

d. The Sarbanes-Oxley Act of 2002

Which of the following demonstrates professional skepticism being practiced? a. The auditor assumes all data provided are reliable. b. The auditor assumes that the management is dishonest. c. The auditor assumes all transactions are correctly and completely recorded. d. The auditor gathers more evidence as he suspects fraud may be present.

d. The auditor gathers more evidence as he suspects fraud may be present.

Jerry works for a small sporting goods store. He suspects a colleague of misappropriating assets. When Jerry discusses this with his wife, Amy, she tells him that since the sporting goods store is audited each year by the local accounting firm, this can't be the case. Which of the following is the most likely unrealistic expectation in this example? a. The auditor is guaranteeing the future viability of the entity. b. The audit is providing complete assurance. c. The auditor has checked all transactions. d. The auditor will definitely find any and all fraud.

d. The auditor will definitely find any and all fraud.

Which of the following is an example of a reason that someone outside of a company would want access to the company's most recent financial statement? a. To find out the prices of the company's products or services b. To find out if there are job opportunities c. To look up the company's stock prices d. To determine whether the company is growing

d. To determine whether the company is growing

Which of the following is an example of an input control? a. Control totals b. Sequence tests c. Visual scanning d. Valid character check

d. Valid character check

A preventive control that ensures that sales invoices are automatically priced using information in the price master file is in response to the _______ assertion. a. classification b. completeness c. existence d. accuracy

d. accuracy

A similarity between the performance gap and the expectation gap is that both gaps a. are relating to the performance of the audit. b. arise from changes in legislation. c. arise from the inherent limitations of audits. d. are from auditing standards and regulations.

d. are from auditing standards and regulations.

A higher materiality level translates into a. higher audit fees. b. auditors being unable to complete work on time. c. a limitation on the scope of the audit. d. auditors doing less work.

d. auditors doing less work.

A lower materiality level translates into a. auditors being unable to complete work on time. b. lower audit fees. c. a limitation on the scope of the audit. d. auditors doing more audit work.

d. auditors doing more audit work.

All of the following are common inherent limitations in internal control, EXCEPT a. human error that results in a breakdown in internal control. b. overriding or disabling of controls. c. collusion by two or more individuals. d. costs of internal controls.

d. costs of internal controls.

The ability of cash flow from operations to cover ______________________ reflects the company's ability to cover current debt maturities and dividends with operating cash flows. a. dividends b. losses c. current debt d. current debt and dividends

d. current debt and dividends

All of the following describe factors that the auditor should gain an understanding of while in the Risk Assessment Phase EXCEPT a. relevant external factors affecting the entity like the general economic conditions, interest rates and the availability of finance. b. the factors at play in the industry sector in which the entity operates, like market size, level of competition, supplier and customer relationships. c. the nature and history of the entity, including its operations, revenue sources, products, services, markets served, key personnel, locations, ownership structure, business investments underway or planned, key customers, key suppliers and its financing structure. d. detailed testing of internal controls, transactions, account balances, and disclosures the auditors have determined to be at high risk of material misstatement.

d. detailed testing of internal controls, transactions, account balances, and disclosures the auditors have determined to be at high risk of material misstatement.

Large class action lawsuits alleging securities fraud against auditors a. must be filed with the local court. b. can either be filed in federal or state court. c. must be filed in a state court. d. must be filed in federal court.

d. must be filed in federal court.

A public company's audit committee should consider a. creditor/debtor relationships. b. direct or material indirect business relationships. c. employment relationships. d. mutual or conflicting interest between the company and the audit firm.

d. mutual or conflicting interest between the company and the audit firm.

Auditors may prefer a reliance on controls approach when working in an environment with _________ internal controls existing at the account or assertion level. a. ill-defined b. no c. weak d. strong

d. strong

All of the following statements about the Foreign Corrupt Practices Act (FCPA) are correct EXCEPT a. the FCPA addresses records retention required under the Securities Exchange Act of 1934. b. through the FCPA, Congress increased the bookkeeping and accounting records requirement of those corporations bound by the 1934 Act. c. the FCPA makes bribing foreign officials illegal. d. the FCPA does not apply to the work of auditors when an integrated audit reports on internal control over financial reporting.

d. the FCPA does not apply to the work of auditors when an integrated audit reports on internal control over financial reporting.

The primary source of audit evidence is a. the content of interviews with employees and management. b. the previous year's audit working papers. c. the audit report. d. the client's accounting records.

d. the client's accounting records.

All of the following are important risks of IT systems compared to manual systems, EXCEPT a. IT systems may be more vulnerable to physical disaster. b. the IT system may produce an audit trail that is available only for a short period of time. c. IT systems are more vulnerable to unauthorized changes. d. there is often more documentary evidence of the performance of control procedures.

d. there is often more documentary evidence of the performance of control procedures.

All of the following are true about transaction-level controls, EXCEPT a. they ensure that business processes are operating effectively. b. they are implemented by businesses to reduce the risk of misstatement due to error or fraud. c. they affect a particular transaction cycle or group of transactions. d. they assess the client's control environment and control activities.

d. they assess the client's control environment and control activities.

Gaining an understanding of entity-level internal control components helps in all of the following ways EXCEPT a. making assessments of the various types of risks of material misstatement. b. understanding the client's business and financial reporting risks. c. establishing the appropriate level of professional skepticism. d. understanding the types of transactions that represent the most risk to the entity.

d. understanding the types of transactions that represent the most risk to the entity.

If control risk is set at high and auditors choose not to test controls, auditors will a. need to issue a modified opinion. b. withdraw from the engagement. c. use the reliance on controls approach. d. use the substantive audit strategy.

d. use the substantive audit strategy.

AU-C 230 Audit Documentation and AS 1215 Audit Documentation require auditors to document each stage of the audit in their working papers to provide a record of a. anti-fraud solutions provided to the client. b. staff assignments on various audit files. c. work completed compared to the original time budgets. d. work completed and evidence gathered in forming their audit opinion.

d. work completed and evidence gathered in forming their audit opinion.